DIRECTORS' REPORT - IAG Limited€¦ · DIRECTORS WHO CEASED DURING THE FINANCIAL YEAR Brian Schwartz was a Director from 1 January 2005 to 31 March 2016; Michael Wilkins was a Director

DIRECTORS' REPORTThe Directors present their report together with the financial report of Insurance Australia Group Limited and the consolidatedfinancial report of Insurance Australia Group Limited and its subsidiaries for the financial year ended 30 June 2016 and theAuditor's Report thereon.

The following terminology is used throughout the financial report: IAG, Parent or Company - Insurance Australia Group Limited; and

Group or Consolidated - the Consolidated entity consists of Insurance Australia Group Limited and its subsidiaries.

DIRECTORS OF INSURANCE AUSTRALIA GROUP LIMITEDThe names and details of the Company's Directors in office at any time during or since the end of the financial year are as follows.Directors were in office for the entire period unless otherwise stated.

CHAIRMANELIZABETH (EB) BRYAN AMBA (Econ), MA (Econ), age 69 - Chairman and Independent Non-Executive DirectorINSURANCE INDUSTRY EXPERIENCEElizabeth Bryan was appointed as a Director of IAG on 5 December 2014, and became Chairman on 31 March 2016. She is theChairman of IAG's People and Remuneration Committee and Nomination Committee, and a member of the Risk Committee. Elizabeth is also the Chairman of Insurance Manufacturers of Australia Pty Limited.

OTHER BUSINESS AND MARKET EXPERIENCEElizabeth brings extensive leadership, strategic and financial expertise to the position of Chairman.

She has over 32 years of experience in the financial services industry, government policy and administration, and on the boards ofcompanies and statutory organisations.

In addition to her role as Chairman of IAG, Elizabeth is also currently Chairman of Virgin Australia and a Director of WestpacBanking Corporation.

Previous roles include Chairmanship of Caltex Australia Limited and UniSuper Limited.

Directorships of other listed companies held in the past three years: IAG Finance (New Zealand) Limited (a part of the Group), since 2016; Virgin Australia, since 2015;

Westpac Banking Corporation, since 2006; and

Caltex Australia Limited (2002-2015).

MANAGING DIRECTORPETER (PG) HARMERAge 56, Managing Director and Chief Executive Officer, Executive DirectorINSURANCE INDUSTRY EXPERIENCEPeter Harmer was appointed Managing Director and Chief Executive Officer of IAG on 16 November 2015. He is a member of IAG'sNomination Committee.

Peter joined IAG in 2010 and has held a number of senior roles, most recently as Chief Executive of the IAG Labs division,responsible for driving digital and innovation across IAG and its brands, and creating incubator areas which will specifically exploreinnovative opportunities across the fintech landscape.

Before this, Peter held the role of Chief Digital Officer with a remit to develop a group-wide digital strategy. He was formerly ChiefExecutive of the Commercial Insurance division created in July 2014 when IAG implemented its new operating model. He joined IAGas Chief Executive Officer, CGU Insurance.

Peter was previously Chief Executive Officer of Aon Limited UK and a member of Aon’s Global Executive Board, and spent sevenyears as Chief Executive Officer of Aon’s Australian operations.

He has over 35 years experience in the insurance industry, including senior roles in underwriting, reinsurance broking andcommercial insurance broking as Managing Director of John C. Lloyd Reinsurance Brokers, Chairman and Chief Executive of Aon Reand Chairman of the London Market Reform Group.

Peter has completed the Harvard Advanced Management Program.

Directorships of other listed companies held in the past three years: IAG Finance (New Zealand) Limited (a part of the Group), since December 2015.

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OTHER DIRECTORSALISON (CA) DEANSBA, MBA, GAICD, age 48 - Independent Non-Executive DirectorINSURANCE INDUSTRY EXPERIENCEAlison Deans was appointed as a Director of IAG on 1 February 2013. She is a member of IAG's People and RemunerationCommittee and Nomination Committee.

OTHER BUSINESS AND MARKET EXPERIENCEAlison was formerly CEO of netus, a technology based investment company focused on building consumer web businesses inAustralia and acquired by Fairfax in 2012. She has over 20 years experience in general management and strategy consulting rolesfocused on e-business and media/entertainment in Australia.

She was appointed as an Independent Non-Executive Director of Westpac Banking Corporation in April 2014, of Kikki-K in October2014 and of Cochlear Limited in January 2015. Alison has also held Chief Executive roles at eBay Australia and New Zealand,eCorp and Hoyts Cinemas.

She is a recipient of the Centenary Medal for services to the business community.

Directorships of other listed companies held in the past three years: Cochlear Limited, since 1 January 2015; and

Westpac Banking Corporation, since 1 April 2014.

HUGH (HA) FLETCHERBSc/BCom, MCom (Hons), MBA, age 68 - Independent Non-Executive DirectorINSURANCE INDUSTRY EXPERIENCEHugh Fletcher was appointed as a Director of IAG on 1 September 2007 and Chairman of IAG New Zealand Limited on 1 September2003. He is a member of IAG's Audit Committee, Risk Committee and Nomination Committee.

Hugh was formerly Chairman (and Independent Director since December 1998) of New Zealand Insurance Limited and CGNUAustralia.

OTHER BUSINESS AND MARKET EXPERIENCEHugh is a Non-Executive Director of Rubicon Limited and Vector Limited and a trustee of The University of Auckland Foundation.Hugh was formerly Chief Executive Officer of Fletcher Challenge Limited, a New Zealand headquartered corporation with assets inthe global building, energy, forestry and paper industries. He retired from an Executive position in December 1997 after 28 yearsas an Executive, 11 of which he served as Chief Executive.

Hugh is a former Deputy Chairman of the Reserve Bank of New Zealand, former member of the Asia Pacific Advisory Committee ofthe New York Stock Exchange, former Non-Executive Director of Fletcher Building Limited, and has been involved as an Executiveand Non-Executive Director in many countries in Asia, including China, India, Singapore, Indonesia, Malaysia and Thailand.

Directorships of other listed companies held in the past three years: IAG Finance (New Zealand) Limited (a part of the Group), since 31 August 2008;

Vector Limited, since 25 May 2007; and

Rubicon Limited, since 23 March 2001.

RAYMOND (SKR) LIMBEcon, BA, LLM, age 57 - Independent Non-Executive DirectorINSURANCE INDUSTRY EXPERIENCERaymond Lim was appointed as a Director of IAG on 1 February 2013. He is a member of IAG's People and RemunerationCommittee and Nomination Committee.

OTHER BUSINESS AND MARKET EXPERIENCERaymond is Chairman of APS Asset Management and Senior Advisor to the Swire Group. He also serves on several Boardsincluding the GIC Pte Ltd, Hong Leong Finance and Raffles Medical Group. He is an adjunct professor at the Lee Kuan School ofPublic Policy, National University of Singapore and the Nanyang Centre for Public Administration, Nanyang Technological University,Singapore.

Raymond is a former Cabinet minister in the Singapore Government (2001-2011). Prior to that, he held various senior positions inthe financial industry including as a Managing Director of Temasek Holdings, Chief Executive Officer of DBS Vickers Securities andChief Economist of ABN AMRO Asia Securities.

He is a Rhodes Scholar and has degrees in economics and law from the universities of Adelaide, Oxford and Cambridge.

Directorships of other listed companies held in the past three years: None.

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JONATHAN (JON) (JB) NICHOLSONBA, age 60 - Independent Non-Executive DirectorINSURANCE INDUSTRY EXPERIENCEJon Nicholson was appointed as a Director of IAG on 1 September 2015. He is a member of IAG's Audit Committee, Risk Committeeand Nomination Committee.

OTHER BUSINESS AND MARKET EXPERIENCEJon is Non-Executive Chairman of Westpac Foundation, a trustee of Westpac Bicentennial Foundation and a Non-Executive Directorof Cape York Partnerships and QuintessenceLabs.

He previously spent eight years with Westpac Banking Corporation, first as Chief Strategy Officer and later as Enterprise Executive.He retired from Westpac in 2014.

Jon’s executive career has included senior roles with a variety of financial and corporate institutions, including the BostonConsulting Group. He also held various roles with the Australian government, including Senior Private Secretary to the PrimeMinister of Australia (Bob Hawke) and senior positions in the Department of the Prime Minister and Cabinet.


TOM (TW) POCKETTCA, BCom, age 58 - Independent Non-Executive DirectorINSURANCE INDUSTRY EXPERIENCETom Pockett was appointed as a Director of IAG, effective 1 January 2015. He is Chair of IAG's Audit Committee and a member ofthe Risk Committee and the Nomination Committee.

OTHER BUSINESS AND MARKET EXPERIENCETom is a Non-Executive Director of Stockland Corporation Limited, a Director of Sunnyfield Independence Association and ofO'Connell St Associates. He previously spent over 11 years as Chief Financial Officer and over seven years as Finance Director withWoolworths Limited, and retired from these roles in February 2014 and July 2014 respectively. Tom was a former Director of ALHGroup Pty Ltd from 2014 to 2016, Hydrox Holdings Pty Ltd from 2014 to 2016 and Chairman and Director of The Quantium GroupHoldings Pty Limited from 2014 to 2016. Tom has also held senior finance roles at the Commonwealth Bank, Lend LeaseCorporation and Deloitte.

Directorships of other listed companies held in the past three years: Stockland Corporation Limited, since 1 September 2014; and

Woolworths Limited (2006-2014).

PHILIP (PJ) TWYMANBSc, MBA, FAICD, age 72 - Independent Non-Executive DirectorINSURANCE INDUSTRY EXPERIENCEPhilip Twyman was appointed as a Director of IAG on 9 July 2008. He is Chair of IAG's Risk Committee, and a member of the AuditCommittee and the Nomination Committee.

Philip was formerly Group Executive Director of Aviva plc, one of the world’s largest insurance groups, based in London. He has alsobeen Chairman of Morley Fund Management and Chief Financial Officer of General Accident plc, Aviva plc and AMP Group. While atAviva plc and its predecessor groups between 1996 and 2004, Philip had executive responsibility for the Group’s insuranceoperations in Asia, Australia, Europe and North America. He has also been responsible for starting and nurturing new insurancebusinesses in China, India, Indonesia and Hong Kong. Overall, Philip has had over 20 years of both board and executive levelgeneral insurance experience.

Philip is on the Boards of Swiss Re in Australia. He was formerly an Independent Non-Executive Director of Perpetual Limited from2004 to 2012, Medibank Private Limited from 2007 to 2012 and Insurance Manufacturers of Australia Pty Limited, a generalinsurance underwriting joint venture with RACV Limited from April 2007 to July 2008.

OTHER BUSINESS AND MARKET EXPERIENCEPhilip is also on the Board of Tokio Marine Management (Australasia) Pty Ltd.


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DIRECTORS WHO CEASED DURING THE FINANCIAL YEAR Brian Schwartz was a Director from 1 January 2005 to 31 March 2016;

Michael Wilkins was a Director from 26 November 2007 to 16 November 2015; and

Yasmin Allen was a Director from 10 November 2004 to 30 September 2015.

SECRETARY OF INSURANCE AUSTRALIA GROUP LIMITEDCHRIS (CJ) BERTUCHBEc, LLB, LLMChris Bertuch was appointed Group General Counsel & Company Secretary on 11 May 2011. Prior to joining IAG, he held theposition of Group General Counsel & Company Secretary at CSR Limited. Chris joined CSR as a corporate lawyer in 1993 and priorto that was a partner in the law firm Gadens Lawyers in Sydney. He brings to IAG more than 28 years of experience in corporate,commercial and trade practices law and dispute resolution. Chris has also completed the Advanced Management Program atHarvard Business School.

MEETINGS OF DIRECTORSThe number of meetings each Director was eligible to attend and actually attended during the financial year is summarised below:

DIRECTOR BOARD OF DIRECTORS

PEOPLE ANDREMUNERATION

COMMITTEEAUDIT

COMMITTEERISK

COMMITTEEBOARD SUBCOMMITTEE

NOMINATIONCOMMITTEE

Scheduled Unscheduled

Total number ofmeetings held 8 7 4 4 4 3 2

Eligibleto

attend Attended

Eligibleto

attend Attended

Eligibleto

attend Attended

Eligibleto

attend Attended

Eligibleto

attend Attended

Eligibleto

attend Attended

Eligibleto

attend Attended

Elizabeth Bryan(a) 8 8 7 6 4 4 - - 3 3 1 1 2 2

Yasmin Allen(b) 3 3 2 2 1 1 1 1 1 1 - - - -

Alison Deans(c) 8 8 7 7 3 3 1 1 1 1 - - - -

Hugh Fletcher(d) 8 8 7 7 - - 4 4 4 4 2 2 - -

Peter Harmer(e) 4 4 3 3 - - - - - - 1 1 - -

Raymond Lim(d) 8 8 7 5 4 4 - - - - - - - -

JonathanNicholson(f) 6 6 7 7 - - 3 2 3 3 - - - -

Tom Pockett(d) 8 8 7 7 - - 4 4 4 4 - - - -

Brian Schwartz(g) 6 6 6 6 3 3 - - - - 3 3 1 1

Philip Twyman 8 8 7 7 - - 4 4 4 4 - - 2 2

Michael Wilkins(h) 4 4 3 3 - - - - - - 2 2 - -

(a) Elizabeth Bryan was appointed to the Risk Committee on 18 September 2015.

(b) Yasmin Allen was a member of the Board of Directors until 30 September 2015, the People and Remuneration Committee and Audit Committee until 30 September2015 and the Risk Committee until 18 September 2015.

(c) Alison Deans was appointed to the People and Remuneration Committee on 18 September 2015 and the Nomination Committee on 5 April 2016. She was a member ofthe Audit Committee and Risk Committee until 18 September 2015.

(d) Hugh Fletcher, Raymond Lim and Tom Pockett were all appointed to the Nomination Committee on 5 April 2016.

(e) Peter Harmer was appointed to the Board on 16 November 2015 and the Nomination Committee on 5 April 2016.

(f) Jonathan Nicholson was appointed to the Board on 1 September 2015, the Audit Committee and Risk Committee on 18 September 2015, and the NominationCommittee on 5 April 2016.

(g) Brian Schwartz was a member of the Board, People and Remuneration Committee and Nomination Committee until 31 March 2016.

(h) Michael Wilkins was a member of the Board until 16 November 2015.


PRINCIPAL ACTIVITYThe principal continuing activity of the Group is the underwriting of general insurance and related corporate services and investingactivities. The Group reports its financial information under the following business divisions:

DIVISION OVERVIEW PRODUCTSConsumer Division(Australia)

51% of Group grosswritten premium(GWP)

Consumer insurance products are sold in Australia through branches, callcentres, the internet and representatives, under the following brands:

NRMA Insurance in NSW, ACT, Queensland and Tasmania;

SGIO in Western Australia;

SGIC in South Australia;

RACV in Victoria, via a distribution agreement with RACV;

Coles Insurance nationally, via a distribution agreement with Coles; and

CGU through affinity and financial institution partnerships and brokerand agent channels.

Consumer Division also includes travel insurance, life insurance, incomeprotection and funeral products which are underwritten by third parties.

Short tail insurance

Motor vehicle

Home and contents

Lifestyle and leisure,such as boat, veteranand classic car andcaravan

Long tail insurance

Compulsory Third Party(motor injury liability)

Business Division(Australia)

26% of Group GWP

Business insurance products are sold in Australia through a network ofaround 2,000 intermediaries, such as brokers, agents, motor dealershipsand financial institutions. Business Division is a leading provider ofbusiness and farm insurance, and also provides workers' compensationservices in every state and territory, except South Australia and Queensland.

Business Division operates across Australia under the following brands:

CGU Insurance;

Swann Insurance;

WFI;

NRMA Insurance;

RACV;

SGIC; and

SGIO.


Business packages

Farm and crop

Commercial property

Construction andengineering

Niche, such as consumercredit

Commercial motor andfleet motor

Marine

Long tail insurance

Workers' compensation

Professional indemnity

Directors' and officers'

Public and productsliability

New Zealand

19% of Group GWP

The New Zealand business is the leading general insurance provider in thecountry in both the direct and broker/agent channels. Insurance productsare provided directly to customers primarily under the State and AMI brands,and indirectly through insurance brokers and agents, under the NZI andLumley Insurance brands. Personal products and simplified commercialproducts are also distributed through agents and under third party brands bycorporate partners, which include large financial institutions.


Motor vehicle

Home and contents

Commercial property,motor and fleet motor

Construction andengineering

Niche, such as pleasurecraft, boat, caravan andtravel

Rural and horticultural

Marine

Long tail insurance

Personal liability

Commercial liability

Asia

4% of Group GWP

The Group has interests in five general insurance businesses in Asia, whichcomprises primarily the direct and intermediated insurance businessunderwritten through subsidiaries in Thailand, Vietnam and Indonesia andthe share of the operating result from the investment in associates inMalaysia and India. The businesses offer personal and commercialinsurance products through local brands.

Corporate and other Corporate and other comprises other activities, including corporate services,capital management activity, placement of the Group's reinsurance program,inward reinsurance from associates and all investment activities.

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OPERATING AND FINANCIAL REVIEWOPERATING RESULT FOR THE FINANCIAL YEARIAG has delivered a sound operating performance in the current year. This was achieved in an environment of challenging operatingconditions in IAG's core markets in Australia and New Zealand. Pressures on profitability were particularly apparent in commercialmarkets, from a prolongation of soft conditions, although growing ability to increase rates was evident, particularly in Australia, asthe year progressed. Long tail Compulsory Third Party (CTP) profitability (notably in NSW) remained under pressure from the higherfrequency of minor severity, legally represented claims.

IAG's short tail personal lines franchises in Australia and New Zealand continued to report strong profitability and sound growth, asthey successfully responded to evolving customer behaviours and needs via a full range of customer propositions complemented bydigital and new product initiatives. Moderate rate increases have countered modest underlying claims inflation.

Benefits from the integration of the former Wesfarmers business and the implementation of a revised Australian operating modelwere realised in line with plan, with a pre-tax run rate of $180 million of non-reinsurance benefits met by the conclusion of thefinancial year.

The contribution from Asia increased, with strong performances from the established businesses in Thailand and Malaysia.Proportional GWP registered growth in excess of 7%. Asia remains an important long term growth option for the Group.

The profit and loss for the current year is inclusive of the first time effects of the whole-of-account quota share and a run-offportfolio reinsurance protection arrangement. Further details of these transactions are outlined below:

Berkshire Hathaway (BH) Quota ShareIAG entered into a 20% whole-of-account quota share arrangement with BH, commencing 1 July 2015 for a minimum term of tenyears. This underpins the strategic relationship with BH announced in June 2015. Since its inception, this agreement has: reduced IAG’s earnings volatility, via the percentage-based fee BH pays to access IAG’s strong core franchise;

enhanced IAG’s underlying margin by approximately 250 basis points;

lowered IAG’s regulatory capital requirement by about $400 million; and

promoted new and complementary business opportunities.

Run-off portfolio reinsurance protectionDuring the second half of the financial year, the Group announced an innovative reinsurance transaction that materially mitigatesits exposure to the Canterbury earthquakes and asbestos. This comprises: an adverse development cover (ADC) that provides NZ$600 million of protection in excess of NZ$4.4 billion for the February

2011 Canterbury earthquake event. After inclusion of the ADC and applicable risk margin, the February 2011 event is nowcovered to the extent of NZ$5 billion; and

a reinsurance arrangement in respect of liability and workers’ compensation risks with exposure to asbestos. These primarilyrelate to policies written by the Australian Business Division in the 1970s and 1980s.

The combination of the overall premium paid and the reinsurance from the asbestos portfolio has resulted in a small net loss,which is recognised in the 'Net corporate expense' line in the management reported results.

Net profit after taxThe Group’s net profit after tax for the financial year was $702 million (2015-$830 million). After adjusting for non-controllinginterests, the net profit attributable to shareholders of the Company was $625 million (2015-$728 million). This included: a significantly lower contribution from investment income on shareholders’ funds, which reflected relatively weak equity

market returns;

a $139 million post-tax charge in respect of accelerated amortisation and impairment of capitalised software assets discussedin further detail in the section below; and

an approximately $100 million increase in tax expense, following a significantly reduced favourable effect from earthquakerelated reinsurance recoveries in a lower tax jurisdiction.

Total Gross Written Premium (GWP) of $11,367 million represented a 0.6% reduction compared to the prior year and wasconsistent with IAG’s ‘relatively flat’ full year guidance. This outcome was characterised by: sound growth in short tail personal lines from a mixture of rate and volume, in both Australia and New Zealand;

flat long tail personal lines GWP in Australia, as volume reduction was offset by necessary rate increases to address claimfrequency issues;

lower commercial lines GWP, driven by lower volumes from the strict application of underwriting disciplines and the effect oflower average rates in soft market conditions; and

sound growth in Asia, principally in Thailand, which was amplified by a favourable foreign exchange translation effect.

The discussion of operating performance in this section is presented on a management reported basis unless otherwise stated.Management reported results are non-IFRS financial information and are not directly comparable to the statutory results presentedin other parts of this Annual Report.

There are two elements of the statutory results for the year that are not expected to be a feature of the Group’s future sustainableearnings profile. As a result and to ensure consistency of the reporting of key insurance measures and metrics, these items havebeen shown in the ‘Net corporate expense’ line in the management reported view of the current year results. This view isconsistent with the approach adopted in IAG’s Investor Report.


Reconciliation between the statutory results (IFRS) and the management reported (non-IFRS) results is presented below:

CONSOLIDATED STATUTORYRESULTS

(IFRS)

RUN-OFFPORTFOLIO

REINSURANCEPROTECTION

CAPITALISEDSOFTWARE

ACCELERATEDAMORTISATION

ANDIMPAIRMENT

MANAGEMENTRESULTS

(NON-IFRS PERINVESTOR

REPORT)

$m $m $m $m

Gross earned premium 11,411 - - 11,411

Outwards reinsurance premium expense (3,883) 700 - (3,183)

Net earned premium 7,528 700 - 8,228

Net claims expense (4,702) (695) - (5,397)

Net commission and underwriting expense (2,116) - - (2,116)

Underwriting profit 710 5 - 715

Net investment income on assets backing insurance liabilities 463 - - 463

Insurance profit before capitalised software acceleratedamortisation and impairment 1,173 5 - 1,178

Capitalised software accelerated amortisation and impairment (198) - 198 -

Insurance profit 975 5 198 1,178

Net corporate expense (18) (5) (198) (221)

Net other operating income/(expenses) (37) - - (37)

Profit before income tax 920 - - 920

Outlined below are the adjustments to the reported underwriting and insurance results: Run-off portfolio reinsurance protection – as discussed above; and

Accelerated amortisation and impairment of capitalised software – during the current financial year, a review has beenundertaken of the Group’s capitalised software platforms in the context of both the growing impact of digital disruption andIAG’s commencement of a programme that will significantly simplify its information technology systems in future years. As aresult of this review, a reduction in the carrying value of capitalised software expenditure of $198 million pre-tax (2015-nil) hasbeen recognised. The assets have a lower recoverable amount reflecting the rapid changes in technology and the reduceduseful life of software assets. The expenses have been recognised within the ‘Net corporate expense’ line in the managementreported results. To aid transparency, this item has been separately identified on the face of the statement of comprehensiveincome which is provided on page 37 of the Annual Report. The change in capitalised software treatment has no impact onIAG’s regulatory capital ratios, as capitalised software is already deducted from regulatory capital. This item has beenexcluded from cash earnings for determination of the dividend, but included when determining executive long term incentiveentitlements.

Unless otherwise stated, the insurance and underwriting profits commentary provided below refers to the Group’s managementreported results and is non-IFRS financial information.

The guidance provided in Australian Securities and Investments Commission Regulatory Guide 230 'Disclosing non-IFRS financialinformation' ('RG 230') has been followed when presenting the management reported results.

Insurance marginIAG’s current year management reported insurance profit of $1,178 million (2015-$1,103 million) was nearly 7% higher than theprior year. Alongside the positive BH quota share effect, the higher reported insurance margin of 14.3% (2015-10.7%) included: higher than expected prior period reserve releases of $207 million, equivalent to 2.5% of Net Earned Premium (NEP), up from

$167 million (1.6% of NEP) in the prior year;

net natural peril claim costs of $659 million, which exceeded allowance by $59 million following a higher than originallyanticipated loss from the east coast low event in June 2016. This compares to the $1,048 million of natural perils claimscosts incurred in the prior year; and

an adverse credit spread impact of $37 million, compared to a favourable effect of $33 million in the prior year.

The prior period reserve release outcome comprised two distinct and partially offsetting elements: higher than expected releases from Australian long tail classes, principally CTP; and

a NZ$150 million increase to risk margin in respect of the February 2011 Canterbury earthquake event, as recognised in thefirst half of the 2016 financial year.

Underlying marginIAG continued to demonstrate relatively strong underlying profitability in the current year. Aside from the quota share impact, theunderlying margin of 14.0% (2015-13.1%) contained: strong profitability in short tail personal lines in Australia and New Zealand, but with some adverse impact from increased

claim frequency;

pressure on returns in the equivalent commercial lines markets, reflecting lower volumes and the cumulative effect of pastrate reductions;

ongoing pressure on NSW CTP profitability from elevated claim frequency levels; and

lower like-for-like expenses, as further benefits from the Wesfarmers integration and revised Australian operating model wererealised.

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IAG defines its underlying margin as the management reported insurance margin adjusted for: net natural peril claim costs less the related allowance for the period;

reserve releases in excess of 1% of NEP; and

credit spread movements.

2016 2015

INSURANCE MARGIN $m % $m %

Management reported insurance margin* 1,178 14.3 1,103 10.7

Net natural peril claim costs less allowance 59 0.7 348 3.3

Reserve releases in excess of 1% of NEP (125) (1.5) (64) (0.6)

Credit spread movements 37 0.5 (33) (0.3)

Underlying insurance margin 1,149 14.0 1,354 13.1

* Management reported insurance margin is the insurance profit as a percentage of NEP as disclosed in the Investor Report. Based on the statutory results, theequivalent statutory insurance margin for the current year is 13.0%.

Similar to the management reported results, the underlying insurance margin is a non-IFRS measure that is designed to present, inthe opinion of management, the results from ongoing operating activities in a way that best and most appropriately reflects theGroup’s underlying performance.

Tax ExpenseIAG reported a tax expense of $218 million (2015-$119 million), representing an effective tax rate of 23.7% (2015-12.5%). For2016, while markedly higher than the prior year, this lower than normal tax rate was largely driven by the favourable resolution of atax audit associated with IAG's former UK operations. The low tax rate for the prior year was driven by reinsurance recoveriesrelating to the 2011 Canterbury earthquake events in New Zealand, which were recorded by IAG’s reinsurance captive in Singapore.

Other contributory elements reconciling the effective tax rate to the prevailing Australian corporate rate of 30% are: differences in tax rates applicable to IAG’s foreign operations, principally in New Zealand, Singapore and Malaysia; and

franking credits generated from IAG’s investment portfolio.

It is IAG’s expectation that the effective tax rate will revert to a more normal (high 20's) level in future periods.

Investment income on shareholders’ fundsInvestment income on shareholders’ funds was a profit of $113 million, a decrease of over 51% on the profit of $231 million in thecorresponding prior year. This included a relatively weak local equity market performance in the current year, with the broaderAustralian index (S&P ASX200 Accumulation) delivering a return of 0.6% (2015-5.7%). At 30 June 2016 the weighting to growthassets (equities and alternatives) within shareholders’ funds stood at approximately 48% (2015-41%).

A. CONSUMER DIVISION (AUSTRALIA)The Consumer Division accounted for 51% of Group GWP and produced a strong underlying margin of 16%. Long tail CTPcontributed flat GWP, while its profitability suffered from current accident year claim frequency issues in the NSW market.

I. PremiumsThe Consumer Division’s GWP increased by 3.3% to $5,801 million in the current year (2015-$5,614 million), driven by growth inshort tail home and motor lines. CTP GWP was relatively flat. Short tail home and motor lines represented approximately 85% ofdivisional GWP, and grew by 4%. Short tail premium growth was dominated by rate movements, in response to higher claimfrequency and repair costs. This was augmented by volume gains in motor, while home volumes were reasonably flat.

The larger established brands generated sound growth in what remained a very competitive environment. While coming off a muchsmaller base, Coles Insurance continued to record strong double digit growth. The current year also included a small initialcontribution from the underwriting of Steadfast personal lines, secured as part of the BH agreement.

II. Insurance profitThe Consumer Division reported an insurance profit of $805 million, compared to $788 million in the prior year. This equates to ahigher reported insurance margin of 19.8% (2015-15.9%), which included: enhancement from the BH quota share;

the benefit of higher reserve releases;

a reduced negative effect from net natural peril claim costs exceeding the associated allowance; and

absorption of an adverse credit spread movement of $40 million compared to the prior year.

B. BUSINESS DIVISION (AUSTRALIA)The Business Division represented 26% of Group GWP. Strict adherence to underwriting disciplines contributed to lower volumes,while the impact of lower average rates diminished from the end of the first half as modest rate rises were progressivelyimplemented. A slightly lower underlying margin reflected pressures on profitability that were not fully offset by the realisation offurther synergies from the Wesfarmers integration and the favourable quota share effect.


I. PremiumsThe Business Division reported GWP of $2,979 million, representing a contraction of 6.7% compared to the prior financial year(2015-$3,192 million) due to tough commercial market conditions. Retention levels were consistent through the year across mostportfolios, with overall GWP reflecting lower average rates, reduced new business volumes, strong competition in property andstrata, tough market conditions in workers’ compensation and specific business transfers.

In the face of the prolonged soft market conditions, the Business Division has maintained its strict underwriting discipline throughtargeted portfolio reviews. The division has also consolidated its leading position in the Australian commercial insurance market,with retention levels applicable to the acquired former Wesfarmers business remaining within the expected range.

II. Insurance profitThe Business Division reported a higher insurance profit of $230 million (2015-$93 million). This equates to a reported insurancemargin of 10.0% (2015-3.0%).

The higher reported margin reflects the net effect of: enhancement from the BH quota share;

lower net natural peril claim costs;

higher prior period reserve releases; and

an adverse credit spread movement of $30 million.

III. Fee based businessBusiness Division generates fee income by acting as an agent under both the NSW and Victorian workers’ compensation schemesthat are underwritten by the respective State governments. A secondary source of fee income is Business Division’s interest inauthorised representative brokers, via its ownership of National Adviser Services (NAS). Net income from fee based operations was$4 million, compared to $16 million in the previous financial year. The overall reduction partly reflects a revision to theremuneration model in relation to the Victorian scheme.

C. NEW ZEALANDNew Zealand represented 19% of Group GWP and continued to perform well, registering a strong underlying margin of 16.9%,despite increased pressure on the commercial side of its business. The modest premium growth in direct personal lines was morethan offset by the impact of tougher market conditions in the commercial segment.

I. PremiumsNew Zealand’s GWP of $2,182 million represented a decrease of 3.7% over the prior year (2015-$2,267 million). The local currencyGWP fell by 2.6% from the combination of: softer premium rates and volume loss in commercial lines, in the face of increased industry capacity; and

partially offsetting GWP growth in the private motor vehicle portfolio from a combination of volume and rate increases.

II. Insurance profitThe New Zealand business produced a lower insurance profit of $135 million in the current year (2015-$216 million). This equatesto a reported insurance margin of 8.6% (2015-10.8%) and reflects the combination of: enhancement from the BH quota share; the NZ$150 million increase to risk margin for the February 2011 earthquake event, as recognised in the first half of the

current year;

increased competition in the commercial lines market, where a continued focus on pricing and underwriting disciplinesremained a priority; and

the realisation of benefits from the Lumley integration, disciplined cost management and continued focus on expense savings.

III. Canterbury RebuildAt 30 June 2016 the New Zealand business had completed over NZ$5.7 billion of claim settlements in respect of the Canterburyearthquakes. Approximately 93% of all claims by number had been fully settled at that date. IAG continued to receive new claimsfrom the Earthquake Commission (EQC) over the course of the current year, as they exceeded the EQC cap of NZ$100,000 (plusGST). It is expected that the rebuild component will be largely complete by the end of calendar year 2016. Certain sharedproperties, newly received over-cap claims from the EQC and claims subject to dispute or litigation may take longer to settle.

As referred above, the Group now has reinsurance protection in place that effectively provides it with cover up to NZ$5 billion inrelation to the February 2011 event. This compares to the current reserved position of NZ$4.4 billion, including risk margin.

D. ASIAAsia represents an important source of long term growth for IAG, with a presence established in five markets: Thailand, Malaysia,India, Vietnam and Indonesia. During the year, IAG determined not to pursue further investment in China. As such, the interestheld in Bohai Property Insurance Company Ltd (Bohai) has been transferred to IAG’s shareholders’ funds investment portfolio.

I. Divisional resultThe division contributed a total profit of $26 million, including shares of associates and allocated costs. This compares to a $21million profit in the prior financial year, and comprises: sound underlying performances by the established businesses in Thailand and Malaysia, where combined profitability

increased by over 16% compared to the prior year;

higher, but still relatively modest, losses from the developing businesses, comprising a similar loss in India compared to theprior year, the absence of earnings from the loan protection run-off portfolio in Vietnam, which consequently moved to a smalloverall loss and the first time inclusion of a full year’s result from Indonesia, which posted a small loss; and

modestly lower regional support and development costs of $31 million (2015-$32 million).

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II. Controlled entitiesGWP from the Group's controlled entities was $386 million, which was an increase of over 9% on the corresponding prior financialyear (2015-$353 million), within this: the Thai business (Safety Insurance) reported an increase in GWP of 8% to $362 million from $334 million for the prior year,

comprising local currency growth of 3% and a favourable foreign exchange translation effect. The GWP movement reflects thecombined effect of increased focus on the used car market, improved renewal retention, introduction of a new carbonemission excise tax which adversely affected new car volumes and a softening of rates in the commercial motor and propertysegments;

AAA Assurance in Vietnam recorded GWP equivalent to $17 million (2015-$18 million); and

Parolamas in Indonesia, which was consolidated by IAG from May 2015, recorded GWP equivalent to $7 million (2015-$1million).

The insurance profit delivered by the controlled entities for the current year was $21 million (2015-$17 million) excluding allocatedcosts. Within this: the Thai business reported an insurance profit of $23 million, compared to $15 million in the corresponding prior year. The

increase reflects the combined effects of strong discipline in portfolio management and underwriting controls, the relativelybenign claims environment, higher reinsurance-related recoveries and prior period reserve releases and weaker investmentincome on technical reserves;

AAA Assurance contributed an insurance loss of $1 million (2015-$2 million profit). The weaker result reflected an increase inthe loss ratio in line with the higher mix of motor business and a significantly reduced loan protection business which carries alow expected loss ratio and a higher expense ratio due to increased acquisition costs; and

Parolamas in Indonesia contributed an insurance loss of $1 million.

III. Share of net profit/(loss) of associatesThe Group's share of associates was a profit of $36 million (2015-$36 million), excluding allocated costs and before amortisation.This result includes AmGeneral Holdings Berhad (AmGeneral) in Malaysia and SBI General Insurance Company Limited (SBIGeneral) in India. AmGeneral accounts for the majority of the Group's share of net profit from associates. IAG’s share ofAmGeneral's profit for the current year increased marginally to $40 million (2015-$39 million) and reflected a combined effect offavourable prior period reserve releases, adverse impact of non-claimable input tax expenses associated with GST implementationand higher business acquisition costs reflecting intense market competition.

E. CORPORATE AND OTHERA pre-tax loss of $282 million was reported, which compares to a loss of $189 million in the corresponding prior year. This primarilyreflects the $198 million non-cash accelerated amortisation and impairment charge on capitalised software assets as referencedabove.

Further details on the operating segments are set out in note 1.3 segment reporting within the Financial Statements.

REVIEW OF FINANCIAL CONDITIONA. FINANCIAL POSITIONThe total assets of the Group as at 30 June 2016 were $30,030 million compared to $31,402 million at 30 June 2015.Movements within the overall decrease of $1,372 million include: a decrease in investments of $2,589 million from the funds outflow associated with the run-off portfolio reinsurance protection

placement, net settlements on the BH quota share, payment of the 2015 final dividend and 2016 interim and specialdividends, claim payments from natural peril events and New Zealand earthquake claims partially offset by sound operatingperformance for the year and the net proceeds received from the issue of the NZD convertible notes;

reinsurance and other recoveries on outstanding claims has increased by $976 million, predominantly relating to the run-offportfolio reinsurance protection placement and recoveries relating to the BH Quota share; and

a decrease in goodwill and intangible assets of $151 million primarily as a result of the reduction in the carrying value ofcapitalised software expenditure following a review of the Group's software platforms as described in note 5.1 goodwill andintangible assets.

The total liabilities of the Group as at 30 June 2016 were $23,245 million compared to $24,384 million at 30 June 2015. Thedecrease in liabilities of $1,139 million is mainly attributable to: a decrease in outstanding claims liability of $946 million predominantly due to claim settlements relating to the prior financial

year natural peril events and the New Zealand earthquakes; and

an increase in interest bearing liabilities relating to the issuance of NZ$350 million of unsecured subordinated convertiblenotes in June 2016; partially offset by the take up on the re-investment offer in respect of existing 2011 unsecuredsubordinated bond holders.

IAG shareholders’ equity (excluding non controlling interests) decreased from $7,018 million at 30 June 2015 to $6,785 million at30 June 2016, reflecting the combined effect of: a sound earnings performance for the year, resulting in a net profit attributable to shareholders of $625 million; and

payment of the final 2015 dividend and 2016 interim and special dividends totalling $948 million.


B. CASH FROM OPERATIONSThe net cash outflows from operating activities for the year ended 30 June 2016 were $1,946 million compared to net cash inflowsof $698 million for the prior corresponding year. The movement is mainly attributable to the net effect of: an increase in claim costs paid of $711 million, mainly attributable to the settlement of various natural peril events that

occurred in the 2015 financial year. The overall quantum of natural peril losses in that year was unusually high;

an increase in outwards reinsurance premium expense paid of $2,602 million which predominantly relates to the BH quotashare and the run-off portfolio reinsurance protection placement; partially offset by

an increase in reinsurance and other recoveries received of $232 million, primarily attributable to the BH quota share; and

an increase in other operating receipts of $698 million in respect of cost recoveries under the BH quota share.

C. INVESTMENTSThe Group’s investments totalled $12.9 billion as at 30 June 2016, excluding investments held in joint ventures and associates,with over 67% represented by the technical reserves portfolio. Total investments at 30 June 2015 were $15.5 billion. Movementsof note since 30 June 2015 are: reduced technical reserves as the 20% BH quota share serves to progressively reduce related insurance liabilities;

increased funds reflecting the sound operating performance of the Group during the year; and

significant dividend payments in October 2015 ($389 million) and March 2016 ($559 million).

As at 30 June 2016, the Group’s overall investment allocation remains conservatively positioned and the credit quality of theinvestment book remains strong, with 77% (2015-81%) of the fixed interest and cash portfolio rated in the 'AA' category or higher.

Technical reserves as at 30 June 2016 accounted for $8.7 billion (2015-$11.0 billion) of the Group's investments, and wereinvested in fixed interest and cash.

The Group’s allocation to growth assets was 48% of the $4.2 billion of shareholders' funds at 30 June 2016 (2015-41%). Includedwithin the Group’s allocation to growth assets are Australian and international equities and alternative investments.

D. INTEREST BEARING LIABILITIESThe Group’s interest bearing liabilities stood at $1,962 million at 30 June 2016, compared to $1,762 million at 30 June 2015. Thenet increase of $200 million is explained by: the issue of NZ$350m of unsecured subordinated convertible notes in June 2016; and

a NZ$138 million reduction in outstanding 2011 subordinated fixed rate bonds, following acceptance of a re-investment offerin respect of the new issue.

E. CAPITAL MIXThe Group measures its capital mix on a net tangible equity basis, i.e. after deduction of goodwill and intangibles, giving it strongalignment with regulatory and rating agency models. It is IAG’s intention to have a capital mix in the following ranges over thelonger term: ordinary equity (net of goodwill and intangibles) 60-70%; and

debt and hybrids 30-40%.

At 30 June 2016, the Group’s capital mix was within the targeted range, with debt and hybrids representing 36.8% (2015-33.8%) oftotal tangible capitalisation.

F. CAPITAL MANAGEMENTThe Group remains strongly capitalised under APRA's Prudential Standards, with regulatory capital of $4,619 million at 30 June2016 (2015-$4,785 million). The Group has set the following related targeted benchmarks: a total capital position equivalent to 1.4 to 1.6 times the Prescribed Capital Amount (PCA), compared to a regulatory

requirement of 1.0 times; and

a Common Equity Tier 1 (CET1) target range of 0.9 to 1.1 times the PCA, compared to a regulatory requirement of 0.6 times.

At 30 June 2016, the Group had a PCA multiple of 1.72 (2015-1.70) and a CET1 multiple of 1.06 (2015-1.14).

Further capital management details are set out in note 3.1 risk and capital management within the Financial Statements.

STRATEGYA. STRATEGIC PRIORITIES At IAG, our purpose is to make your world a safer place.

IAG’s opportunity is to embrace innovation: The way we live our lives is changing at a rapid pace driven by new technologiesand shifting demographic trends. This means our customers are faced with new challenges and opportunities every day. IAGwill help them navigate through this journey and present them with innovation to make their lives safer and better. IAG willembrace the change and participate in making things better for our customers, whether in Australia, New Zealand or Asia.

Our objective is to deliver world class customer experiences: All the elements of our strategy are driven by the customer andtheir needs – to make their lives easier and safer, to improve their interactions with IAG and make the company as successfulas possible to reinvest in our leadership position.

IAG’s purpose means that whether you are a customer, partner, employee, shareholder or part of the communities IAG servesacross Australia, New Zealand or Asia, IAG exists to ‘make your world a safer place’. IAG believes its purpose will enable it tobecome a more sustainable business over the long term, and deliver stronger and more consistent returns for its shareholders.

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Strategic frameworkTo fulfil its purpose, IAG is focusing on two key strategic themes: Leading the change that its customers need and demand. IAG is embracing innovation, to help customers navigate through

change to make their lives safer and better. This has the company‘s customers at its core, and aims to make the experiencesthey have with IAG world class, through technology and smart ideas, at each individual interaction.

Fuelling the business so that it can deliver on these opportunities. To fuel the investments in its continued leadership, IAGneeds to be leaner and more responsive. This involves tackling necessary changes to the way IAG operates – simplifyingprocesses and systems, and optimising resources, to be more efficient.

B. BUSINESS RISK AND RISK MANAGEMENTManaging risk is central to the sustainability of IAG's business, its purpose and delivery of value to shareholders. IAG uses anenterprise approach to risk and its risk management framework is a core part of the governance structure and includes internalpolicies, key management processes and culture. The Risk Management Strategy (RMS) is reviewed annually or as required by theRisk Committee (RC) before being recommended for approval by the Board. IAG’s risk and governance function provides regularreports to the RC on the operation of IAG’s risk management framework, the status of key risks, risk and compliance incidents andrisk framework changes. IAG’s Internal Audit function provides reports to the Audit Committee (AC) on significant audit findings andother audit related matters.

Roles and responsibilities of the Board and its standing committees, the AC, the RC, the People and Remuneration Committee(PARC) and the Nominations Committee, are set out in the Corporate Governance section of the IAG website.

The Group is exposed to multiple risks relating to the conduct of its general insurance business. The following risks noted beloware not meant to represent an exhaustive list, but the risks faced by the Group that have been identified in IAG's RMS: strategic risk: the risk of not achieving corporate or strategic goals;

insurance risk: the risk that the Group is exposed to financial loss, as a result of inadequate or inappropriate underwriting,inadequate or inappropriate product pricing, unforeseen, unknown or unintended liabilities that may eventuate, inadequate orinappropriate claims management including reserving or insurance concentration risk (i.e. by locality, segment or distribution);

reinsurance risk: the risk of insufficient or inappropriate reinsurance coverage, inadequate underwriting and pricing ofreinsurance exposures retained by IAG’s reinsurance captives, inadequate or inappropriate reinsurance recovery management,reinsurance arrangements not legally binding and reinsurance concentration risk;

financial risk: the risk of inadequate liquidity, adverse movements in market prices (equities, derivatives, interest rates, foreignexchange, etc) or inappropriate concentration within investment funds, a counterparty failing to meet its obligations and/orinappropriate capital management; and

operational risk: the risk of loss from inadequate or failed internal processes, people, systems and/or external events.

A disciplined approach to risk management has been adopted and IAG believes this approach provides the greatest long termlikelihood of being able to meet the objectives of all stakeholders, including policyholders, lenders, regulators and shareholders.

Detail of the Group's overall risk management framework, which is outlined in the RMS, is set out in note 3.1 risk and capitalmanagement within the Financial Statements and in the Corporate Governance Statement, which is available atwww.iag.com.au/about-us/corporate-governance.

C. ECONOMIC, ENVIRONMENTAL AND SOCIAL SUSTAINABILITY RISKAs a general insurer that operates in Australia, New Zealand and throughout Asia, IAG is exposed to economic, environmental andsocial sustainability risks and opportunities. The IAG Board has overarching responsibility for these areas, which are managedunder shared value and sustainability. Performance and risk management is formally reported to the Board twice a year, with ad-hoc updates as required. A cross-functional Shared Value Advisory Council (SVAC) was established in 2014 to fulfil the role of asustainability committee for IAG and provides advice and input to the organisation's approach to shared value, sustainability andbroader community activity. The SVAC meets every 2-3 months, is chaired by the Group Executive Office of the CEO, and iscomprised of Senior Leaders from across the business, including the Group Executive for People, Performance and Reputation andthe Chief Customer Officer.

The Group has in place a shared value framework that guides decision making and ensures value is being created for both thecommunity and IAG. This framework defines eight focus areas that support our commitment to help make communities Safer,Stronger and More Confident. The Group's sustainability performance is managed within this framework and supported by anumber of policies and position statements.

IAG is a signatory to a number of voluntary principles-based frameworks which guide the integration of environmental, social andgovernance (ESG) considerations into our business practices. These include the United Nations Environment Program FinanceInitiative (UNEPFI), Principles for Sustainable Insurance (PSI) and Principles for Responsible Investment (PRI). IAG is also asignatory of the Geneva Association's Climate Risk Statement.

Details of the Group's management of Economic, Environmental and Social Sustainability Risk are outlined in Principle 7.4 of theCorporate Governance Statement, which is available on the IAG website. More detail on IAG's shared value and sustainabilityperformance is outlined in the 2016 Annual Review and Sustainability Report, which is available at www.iag.com.au/shared-value.


CORPORATE GOVERNANCEIAG is committed to attaining the highest level of corporate governance to ensure the future sustainability of the organisation andto create long term value for its shareholders. To achieve this, IAG aspires through its spirit to be closer, braver and faster in all itsinteractions with customers, partners and shareholders, and actively monitors corporate culture.

IAG's Corporate Governance Statement has been approved by the Board. For the financial year ended 30 June 2016, IAG hascomplied with the Australian Securities Exchange Corporate Governance Council Principles and Recommendations (3rd edition) andis compliant as at 19 August 2016. Further details on IAG's corporate governance practices and the Corporate GovernanceStatement are available at www.iag.com.au/about-us/corporate-governance.

OUTLOOKIAG’s GWP growth for the year ended 30 June 2017 is expected to remain relatively flat. The Group’s reported margin guidance forthe year ended 30 June 2017 is expected to be in the range of 12.5-14.5%. Underlying assumptions behind the reported marginguidance are: net losses from natural perils in line with an allowance of $680 million (2016-$600 million);

prior period reserve releases of at least 1% of NEP; and

no material movement in foreign exchange rates or investment markets.

DIVIDENDSDetails of dividends paid or determined to be paid by the Company and the dividend policy employed by the Group are set out in thenote 4.4 dividends within the Financial Statements.

Cash earnings are used for the purposes of targeted ROE and dividend payout policy and are defined as: net profit after tax attributable to IAG shareholders;

plus amortisation and impairment of acquired identifiable intangibles; and

excluding any unusual items (non-recurring in nature).

2016 2015

CASH EARNINGS $m $m

Net profit after tax 625 728

Acquired intangible amortisation and impairment 57 150

682 878Non-recurring items:

Corporate expenses 221 155

Tax effect on corporate expenses (36) (46)

Cash earnings* 867 987

Interim dividend 316 304

Final dividend 316 389

Dividend payable 632 693

Cash payout ratio* 72.9% 70.2%

* Cash earnings and cash payout ratio represent non-IFRS financial information.

IAG has revised its full year dividend payout policy to pay dividends equivalent to approximately 60–80% (30 June 2015-50-70%) ofreported full year cash earnings in respect of any given financial year.

The Board has determined to pay a fully franked final dividend of 13.0 cents per ordinary share (cps) (2015-16.0 cps), bringing thefull year dividend to 26 cps (2015-29 cps). In addition, IAG has paid a special fully franked dividend of 10.0 cents per ordinaryshare in March 2016. The final dividend is payable on 5 October 2016 to shareholders registered as at 5pm on 7 September 2016.The Company's Dividend Reinvestment Plan (DRP) will operate for the final dividend by acquiring shares on market with no discountapplied. The DRP Issue Price will be based on a volume weighted average share price as defined in the DRP terms. The last datefor the receipt of an election notice for participation in the Company's DRP is 8 September 2016. Information about IAG’s DRP isavailable at www.iag.com.au/shareholder centre/dividends/reinvestment.

SIGNIFICANT CHANGES IN STATE OF AFFAIRSDuring the financial year the following changes became effective: On 16 November 2015, the Board appointed Peter Harmer as Managing Director and CEO. Mr Harmer replaced Michael

Wilkins who retired as Managing Director and CEO, but remained in an executive capacity until 31 March 2016.

New structure and leadership team:

Effective 9 December 2015, a new organisational structure and leadership team were announced, to drive the Group’sfuture profitability and growth. Roles and responsibilities of the new leadership team are available on the IAG website.

In the Australian market IAG has two customer facing divisions responsible for sales, service, and brand and marketingexecution. The Consumer Division focuses on individuals and families, and the Business Division focuses on businessesof all sizes.

IAG continues to report its financial results using its four reporting segments: Consumer Division, Business Division, NewZealand and Asia.

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On 16 February 2016, the Board appointed Elizabeth Bryan AM as its Chairman, effective 31 March 2016. Ms Bryansucceeded Brian Schwartz AM, who announced his intention to retire from the Board at the Company's annual general meetingin October 2015.

On 16 February 2016, IAG completed an innovative reinsurance transaction with BH that mitigates the Group’s exposure to theCanterbury earthquakes and asbestos related liabilities. The transaction comprised: an ADC which provides NZ$600 million of protection above NZ$4.4 billion for the February 2011 Canterbury earthquake

event; and

a reinsurance arrangement in respect of IAG’s asbestos portfolio. On 15 June 2016, the Company issued NZ$350 million of subordinated convertible term notes. The subordinated notes

qualify as Tier 2 Capital under the APRA capital adequacy framework for general insurers.

EVENTS SUBSEQUENT TO REPORTING DATEDetail of matters subsequent to the end of the financial year are set out below and in note 7.3 events subsequent to reporting datewithin the Financial Statements. These include: On 19 August 2016, the Board determined to pay a final dividend of 13 cents per share, 100% franked. The dividend will be

paid on 5 October 2016. The dividend reinvestment plan will operate by acquiring shares on-market for participants with nodiscount applied.

On 19 August 2016, IAG announced, as part of the Group’s active capital management program, an off-market share buy-back(via a tender process) of up to $300 million. The share buy-back is expected to represent over 2% of IAG’s outstanding issuedordinary share capital. The capital component of the share buy-back is expected to be $2.99 and the balance deemed to be afully franked dividend. The proceeds of the share buy-back are expected to be dispatched to participating shareholders on 17October 2016.

NON-AUDIT SERVICESDuring the financial year, KPMG performed certain other services for the Group in addition to its statutory duties.

The Directors have considered the non-audit services provided during the financial year by KPMG and, in accordance with writtenadvice provided by resolution of the AC, are satisfied that the provision of those non-audit services by the Group’s auditor iscompatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the followingreasons: all non-audit assignments were approved in accordance with the process set out in the IAG framework for engaging auditors

for non-audit services; and

the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES110 Code of Ethics for Professional Accountants of the Chartered Accountants Australia and New Zealand and CPA Australia,as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity forthe Company, acting as an advocate for the Company or jointly sharing risks and rewards.

The level of fees for total non-audit services amounted to approximately $1.5 million (refer to the note 8.3 remuneration of auditorsfor further details of costs incurred on individual non-audit assignments).

LEAD AUDITOR'S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT2001The lead auditor's independence declaration is set out on page 35 and forms part of the Directors' Report for the year ended 30June 2016.

INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERSThe Company’s constitution contains an indemnity in favour of every person who is or has been: a Director of the Company or a subsidiary of the Company; or

a Secretary of the Company or of a subsidiary of the Company; or

a person making or participating in making decisions that affect the whole or a substantial part of the business of theCompany or of a subsidiary of the Company; or

a person having the capacity to affect significantly the financial standing of the Company or of a subsidiary of the Company.

The indemnity applies to liabilities incurred by the person in the relevant capacity (except a liability for legal costs). That indemnityalso applies to legal costs incurred in defending or resisting certain legal proceedings. The indemnity does not apply where theCompany is forbidden by statute or, if given, would be made void by statute.

In addition, the Company has granted deeds of indemnity to certain current and former Directors and Secretaries and members ofsenior management of the Company and its subsidiaries and associated companies. Under these deeds, the Company: indemnifies, to the maximum extent permitted by law, the former or current Directors or Secretaries or members of senior

management against liabilities incurred by the person in the relevant capacity. The indemnity does not apply where the liabilityis owed to the Company or any of its subsidiaries or associated companies, or (in general terms) where the liability arises outof a lack of good faith, wilful misconduct, gross negligence, reckless misbehaviour or fraud; and

is also required to maintain and pay the premiums on a contract of insurance covering the current or former Directors ormembers of senior management against liabilities incurred in respect of the relevant office except as precluded by law. Theinsurance must be maintained until the seventh anniversary after the date when the relevant person ceases to hold office. Disclosure of the insurance premiums and the nature of liabilities covered by such insurance are prohibited by the relevantcontract of insurance.


REMUNERATION REPORTLETTER FROM THE PEOPLE AND REMUNERATION COMMITTEE CHAIRMAN

Dear Shareholder

IAG is pleased to present its Remuneration Report for the year ended 30 June 2016.

The People and Remuneration Committee (PARC) reaffirms its commitment to delivering remuneration outcomes that reflect bothbusiness performance and shareholder returns, as well as ensuring IAG is able to continue to attract and retain high qualityexecutives.

Throughout the year the business strategy has evolved, and remuneration frameworks continue to support the changing needs ofthe business. The overall organisation results are reflected in the remuneration outcomes received by Executives.

The following table provides a summary of some key highlights for the year ended 30 June 2016:

CURRENT YEAR HIGHLIGHTS SUMMARY

A new leadership team wasappointed

In November 2015, Peter Harmer was appointed as Group CEO and in December 2015 Peterappointed his new Executive team.

Fixed pay supports IAG’sremuneration principles

The fixed pay for the newly appointed Executive team reflects their experience in the relevantroles, as well as internal and external benchmarks. This supports key principles underpinningIAG’s remuneration framework of aligning remuneration to the incumbent’s skill and experience,internal relativities of IAG’s Executive team and external roles to remain market competitive.

As a result of difficult market conditions, it was determined by PARC in August 2015 that no fixedpay increases would be provided to our Executive team over the 2016 financial year other thanwhere there was a change in role.

Short term performance wassound

In the 2016 financial year, IAG undertook significant changes designed to set up the organisationfor continuous growth and profitability into the future. Whilst these changes impacted leadershipteams, operating models and organisational structures, IAG’s short term business performanceremained sound. The business maintained a stable market position, continued to perform well atan underlying level and IAG has received some notable recognition for its leadership in theindustry.

Reflective of the business’ short term performance, the average Short Term Incentive (STI)payment was 67% of the maximum achievable for the Executive team.

IAG focuses Executives onbeing Closer, Braver, Faster

The IAG Spirit was introduced in the current financial year and encompasses what is important toIAG; how we serve our customers, partners, shareholders, communities and each other. The IAGSpirit is measured through an individual’s commitment and demonstrated behaviour to displayIAG’s core values of Closer, Braver, Faster.

To align Executive behaviours with the IAG Spirit, eligibility for a STI payment is now dependent ondemonstrating the IAG Spirit.

IAG delivers sustained longterm performance

IAG once again achieved strong returns, with full vesting of the Return on Equity (ROE) portion ofthe LTI. IAG ranked at the 52nd percentile of its peer group and achieved 54% vesting of the TotalShareholder Return (TSR) component of the Long Term Incentive (LTI).

ROE vesting scheduleadjusted to align to marketpractice

A review was conducted during the 2016 financial year to assess the appropriateness of our LTIperformance hurdles. The review confirmed that TSR and ROE continue to appropriately alignExecutives with IAG’s three to four year aspirations, and consequently the current performancehurdles will remain in place for the 2016 LTI awards. The PARC has determined that a moredetailed review of the ROE hurdle will take place prior to the 2017 awards to ensure it continues todrive the desired outcomes for shareholders.

Shareholder interests arealigned through a mandatoryshareholding requirement

As part of IAG’s philosophy of aligning the interests of Executive and Non Executive Directors(NEDs) with those of shareholders, all Executive and NEDs are required to hold a proportion oftheir remuneration as IAG shares. All Executives and NEDs who were required to meet theirmandatory shareholding requirement at 30 June 2016 have done so.

Review of BalancedScorecard for the 2017financial year

IAG is currently undertaking a review of its Executive Remuneration Framework. As part of thisreview, the incorporation of a Net Promoter Score (NPS) into the balanced scorecard is currentlyunder consideration. A NPS measure focuses Executives’ efforts on earning and sustaining loyalcustomers and vocal promoters of the business, by nurturing a business culture which IAGcustomers can believe in and rely upon.

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IAG is committed to ensuring the Remuneration Report presents executive remuneration in a consistent, concise and simplemanner, as well as complying with the Corporations Act 2001. As in previous years, in this report the Company voluntarily disclosesthe actual remuneration received by Executives, in addition to meeting our statutory reporting obligations.

The People and Remuneration Committee are confident that IAG’s remuneration framework supports the Group’s financial andstrategic goals now and into the future.

Yours sincerely

Elizabeth Bryan AMChairman - People and Remuneration Committee


CONTENTS PAGE

A Key management personnel covered in this report 17

B 2016 snapshot 18

C Executive remuneration governance 20

D Executive remuneration structure 21

E Linking the Group's performance and reward 23

F Executive employment agreements 26

G Statutory remuneration disclosure requirements 27

H Non-Executive Director remuneration 30

I Related party interests 32

J Key terms and definitions 33

A. KEY MANAGEMENT PERSONNEL COVERED IN THIS REPORTThis report sets out the remuneration details of IAG's KMP as listed below:

NAME POSITION TERM AS KMP(a)

Executives

Peter Harmer(b) Managing Director and Chief Executive Officer Full year

Julie Batch Chief Customer Officer From 8 December 2015

Chris Bertuch Group General Counsel & Company Secretary From 8 December 2015

Ben Bessell Chief Executive, Australian Business Division Full year

Duncan Brain Chief Executive, Asia Full year

David Harrington Group Executive, Office of the CEO From 8 December 2015

Nicholas Hawkins Chief Financial Officer Full year

Jacki Johnson(c) Group Executive, People, Performance & Reputation Full year

Anthony Justice Chief Executive, Australian Consumer Division From 8 December 2015

Mark Milliner Chief Operating Officer From 27 April 2016

Craig Olsen Chief Executive, New Zealand From 1 January 2016

Claire Rawlins Group Executive, Digital & Technology From 8 December 2015

Clayton Whipp Chief Risk Officer Full year

Executives who ceased as key management personnel

Michael Wilkins Managing Director and Chief Executive Officer Ceased 16 November 2015

Andy Cornish(d) Acting Chief Operating Officer Ceased 27 April 2016

Alex Harrison Chief Executive, Enterprise Operations Ceased 31 August 2015

Leona Murphy Chief Strategy Officer Ceased 31 December 2015

Non-Executive Directors

Elizabeth Bryan(e) Chairman, Independent Non-Executive Director Full year

Alison Deans Independent Non-Executive Director Full year

Hugh Fletcher Independent Non-Executive Director Full year

Raymond Lim Independent Non-Executive Director Full year

Jonathan Nicholson Independent Non-Executive Director From 1 September 2015

Tom Pockett Independent Non-Executive Director Full year

Philip Twyman Independent Non-Executive Director Full year

Non-Executive Directors who ceased as key management personnel

Brian Schwartz Chairman, Independent Non-Executive Director Ceased 31 March 2016

Yasmin Allen Independent Non-Executive Director Ceased 30 September 2015

(a) All remuneration is disclosed from the date the individual was appointed as a KMP (ie. their contract commencement date) to the date of cessation.

(b) Peter Harmer held the position of Chief Digital Officer until 31 July 2015, then Chief Executive IAG Labs until 16 November 2015. He commenced as Managing Directorand Chief Executive Officer on 16 November 2015.

(c) Jacki Johnson held the position of Chief Executive, New Zealand until 31 December 2015. She commenced as Group Executive, People, Performance and Reputationon 1 January 2016.

(d) Andy Cornish held the position of Chief Executive Personal Insurance up to 8 December 2015 and acting Chief Operations Officer until 27 April 2016. He ceasedemployment on 1 July 2016. His termination benefits are disclosed in the current financial year.

(e) Elizabeth Bryan held the position of Deputy Chairman from 5 December 2014 until 31 March 2016, when she commenced as Chairman.

Key terms that are used throughout the report are defined in detail in section J key terms and definitions.

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B. 2016 SNAPSHOTI. Actual remuneration received by ExecutivesFor remuneration details provided in accordance with the Accounting Standards refer to section G Statutory remunerationdisclosure requirements.

TABLE 1 - ACTUAL REMUNERATION RECEIVED IN 2016 AND 2015

NAMEFINANCIAL

YEAR FIXED PAY

OTHERBENEFITS AND

LEAVEACCRUALS

TERMINATIONBENEFITS CASH STI

DEFERRED STIVESTED LTI VESTED

TOTAL ACTUALREMUNERATION

RECEIVED

$000 $000 $000 $000 $000 $000 $000

(1) (2) (3) (4)

EXECUTIVES

Peter Harmer 2016 1,460 70 - 905 311 1,428 4,174

2015 1,012 (23) - 473 432 2,152 4,046

Julie Batch 2016 343 34 - 153 - - 530

Chris Bertuch 2016 400 33 - 138 - - 571

Ben Bessell 2016 686 31 - 271 83 161 1,232

2015 123 (7) - 65 - - 181

Duncan Brain 2016 934 261 - 532 154 273 2,154

2015 921 263 - 469 210 429 2,292

David Harrington 2016 346 33 - 160 - - 539

Nicholas Hawkins 2016 1,026 (48) - 593 318 1,428 3,317

2015 1,012 56 - 603 463 2,198 4,332

Jacki Johnson(5) 2016 1,053 92 - 585 252 1,286 3,268

2015 1,096 (43) - 418 398 1,949 3,818

Anthony Justice 2016 372 (6) - 156 - - 522

Mark Milliner 2016 181 20 - - - - 201

Craig Olsen(6) 2016 330 36 - 124 - - 490

Claire Rawlins 2016 341 32 - 152 - - 525

Clayton Whipp 2016 784 64 - 415 117 243 1,623

2015 755 64 - 341 211 367 1,738

EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL

Michael Wilkins 2016 808 (46) 1,060 1,197 792 3,580 7,391

2015 2,112 232 - 1,314 1,232 5,514 10,404

Andy Cornish 2016 875 49 1,086 887 256 1,486 4,639

2015 1,052 93 - 602 469 2,290 4,506

Alex Harrison 2016 145 (6) 782 - 128 260 1,309

2015 849 51 - 611 192 397 2,100

Leona Murphy 2016 466 52 808 410 261 1,286 3,283

2015 910 38 - 505 411 1,981 3,845

(1) Further details are provided in table 8 in section G Statutory remuneration disclosure requirements.

(2) Includes payment in lieu of notice, redundancy payment and outplacement services.

(3) The deferred STI vesting on 1 September 2015 was valued using the five day weighted average share price $5.14 (1 September 2014: $6.49).

(4) The LTI vested was valued using the five day weighted average share price at vesting date was $5.50 for awards vested on 24 August 2015 and $4.84 for awards vestedon 30 September 2015 (20 August 2014: $6.27; 30 September 2014: $6.18).

(5) Remuneration for Jacki Johnson between 1 July 2015 and 1 January 2016 was determined in New Zealand dollars. Full year remuneration is reported in Australiandollars.

(6) Remuneration for Craig Olsen was determined in New Zealand dollars and reported in Australian dollars.

There were no fixed pay increases for Executives during the 2016 financial year except for newly appointed Executives to recognisethe increased responsibilities associated with their new roles.


II. Group CEO remuneration explainedActual remuneration received is based on the Group’s performance over a number of different time periods and is linked explicitlyto the performance hurdles and timeframes over which they are achieved.

Using the current Group CEO’s remuneration as an example, actual remuneration received has reduced this year from previousyears, given the number of rights vested was lower this year than in prior years. This was due to reduced share price movement,TSR performance and no retests occurring for the TSR hurdle.

The following graph illustrates the current Group CEO's remuneration, broken down into the components of his remuneration plan.

19

C. EXECUTIVE REMUNERATION GOVERNANCE

I. Remuneration guiding principlesIAG's remuneration practices have been designed to achieve the following objectives, being to: align remuneration with the interests of IAG’s shareholders;

motivate employees to achieve superior and sustainable performance and discourage underperformance;

retain market competitiveness to attract and retain high quality people;

clearly communicate the remuneration policy; and

encourage constructive behaviours and prudent risk taking that support long term financial soundness.

II. Use of remuneration consultantsThe PARC engaged EY remuneration consultants to provide KMP remuneration benchmarking. The remuneration data providedwas used as an input to the remuneration decisions by the Board only. No remuneration recommendations, as defined by theCorporations Act 2001, were provided by EY. The Board considered the data provided, together with other factors, in settingExecutives’ remuneration.

III. Adjustment policyEach year, the Board assesses whether variable remuneration under the Deferred Award Rights (DAR) and Executive PerformanceRights (EPR) Plans needs to be adjusted to: protect the financial soundness of IAG or an operating segment;

respond to significant unexpected or unintended consequences that were not foreseen by the Board; or

respond to other circumstances where the Board determines that an adjustment is necessary, including circumstances wherebehaviour does not align with a desired risk culture, to ensure that an inappropriate reward outcome does not occur.

In the year ended 30 June 2016, this investigation did not reveal any requirement for the Board to adjust remuneration.

IV. Mandatory shareholding requirementThe Group CEO is required to accumulate and hold IAG ordinary shares with a value of two times their base salary, and theExecutive team one times their respective base salaries. Executives have four financial years from their date of appointment as anExecutive to meet their requirement. Holdings are assessed annually at the end of each financial year, using the closing shareprice at 30 June and the Executive's base salary from four years prior. The shareholding includes Executives' directly held sharesand rights vested and unexercised as at 30 June, for entities controlled, jointly controlled or significantly influenced by theExecutive. Shares held by the Executives' domestic partner and dependants are not included in the mandatory shareholdingrequirement calculation. All Executives appointed prior to 30 June 2012 met the mandatory shareholding requirement at 30 June2016.


D. EXECUTIVE REMUNERATION STRUCTUREI. Summary of remuneration componentsThe table below outlines the remuneration components and the strategic objective of each component:

TABLE 2 - REMUNERATION COMPONENTSCOMPONENT MEASURE STRATEGIC OBJECTIVE

LTI TSR 50% TSR provides a direct link between Executive reward and shareholder return by measuring thevalue created for shareholders through the appreciation of the share price and the value ofdividends.

ROE 50% ROE provides evidence of company profitability and is linked to shareholder return. IAG usesROE as a key measure of the efficiency of the Group’s financial performance.

STI Balancedscorecard

Financial and non-financial measures provide a balance between rewarding the achievement offinancial targets and non-financial objectives that drive the execution of IAG's strategy andfuture growth.

Fixed pay Positiondescription

Fixed pay is market competitive based on the roles' experience, skills, internal relativities of theExecutive team and market pay levels of similar external roles. Fixed pay for Australian basedExecutives is determined by reference to peer groups, including financial services companies inthe S&P/ASX 50 Index and companies that are of similar size to IAG. Relevant local marketpeer groups are referenced for overseas based Executives.

The remuneration components are structured to reward Executives across different timeframes. The graph below shows theremuneration components and the periods over which performance is assessed:

II. Potential remuneration mixTotal potential remuneration for Executives comprises a mix of fixed pay and maximum potential at-risk remuneration (STI and LTI).The mix, shown in the graph below, is designed to pay Executives competitively based on their performance, while providing stronggovernance to protect the financial soundness of the business and shareholders’ interests.

Notes:

Potential remuneration is based on current remuneration at 30 June 2016. STI and LTI are based on maximum opportunities.

21

III. At-Risk remunerationThe Board strongly believes that the fundamental driver for executive remuneration should be long term financial performance thatgenerates value for IAG shareholders. The Board further recognises that executive remuneration is guided by regulation andmarket forces and it regularly reviews IAG’s executive remuneration to ensure IAG uses at-risk remuneration components toachieve its remuneration and performance objectives.

a. Cash and deferred short term incentive (STI)Cash and deferred STI is the at-risk remuneration designed to motivate and reward for performance in the financial year. The graphbelow shows the maximum STI potential, the gateway and the measures that drive the STI outcome for the 2016 financial year:

TABLE 3 - STI PLANPerformance gateway The IAG Spirit describes what is important to IAG; how we serve our customers, partners,

shareholders, communities and each other. Eligibility for a STI payment is dependent ondemonstrating the IAG Spirit. The IAG Spirit is measured through an individual’s commitment anddemonstrated behaviour to display IAG’s core values of Closer, Braver, Faster. Therefore, ifExecutives do not demonstrate the behaviours within the IAG Spirit, they will not be eligible for a STIpayment. The IAG Spirit gateway is designed to highlight the link between demonstrating the IAGSpirit and the achievement of performance outcomes.

Performance measuresand evaluation

Performance is measured against a balanced scorecard that uses both financial and non-financialgoals (the balanced scorecard is discussed in more detail in table 5). The Group CEO’s STI isrecommended by the PARC based on their balanced scorecard performance and is approved by theBoard.

The amount of STI paid to members of the Executive team is recommended by the Group CEO to thePARC based on the Executive team members' balanced scorecard performance and subsequentlyrecommended by the PARC for approval by the Board. The Board may apply discretion in determiningthe STI outcomes to ensure they appropriately reflect an Executive’s performance.

Instrument Two-thirds of the STI is paid as cash, with the remaining one third deferred in the form of DeferredAward Rights (DAR) that vest equally over two years.

Key terms of the deferredSTI

Deferred STI is issued in the form of DAR, which are rights over IAG ordinary shares. They are issuedto Executives during the financial year at no cost, to the value of their deferred STI amount. Thenumber of DAR issued is calculated based on the price of an IAG ordinary share at 30 June beforethe grant date. Executives who participate in this plan become eligible to receive one IAG ordinaryshare per DAR by paying an exercise price of $1 per tranche of DAR exercised, subject to theircontinuing employment with the Group for a period determined by the Board. No dividend is paid orpayable for any unvested or vested and unexercised DAR.

Forfeiture conditions The Board retains the discretion to adjust downwards the unvested portion of any awards. DAR willbe forfeited if the Executive resigns before the vesting date. When an Executive ceases employmentin special circumstances, such as redundancy, any unvested rights may be retained on cessation ofemployment, subject to Board discretion.


b. Long term incentive (LTI)LTI grants are determined annually by the Board. The grants are provided in the form of Executive Performance Rights (EPR) withmeasures aligned to the Group’s strategic financial targets. The maximum value of EPR that can be granted to the Group CEO andExecutive team members under the LTI plan is 150% and 125% of fixed pay respectively.

TABLE 4 - LTI PLANRETURN ON EQUITY (ROE) RELATIVE TOTAL SHAREHOLDER RETURN (TSR)

Description ROE - 50% weighting

Cash return on equity is measuredrelative to the Group’s WACC.

TSR - 50% weighting

Total shareholder return is measured against that of the top50 industrials within the S&P/ASX 100 Index.

Testing The ROE portion of the LTI is testedfrom 1 July of the grant year to 30June three years later.

The TSR portion of the LTI is tested four years after 30September of the grant year with no additional opportunityfor retesting.

TSR granted prior to July 2013 is tested after three years andthen again at four years and five years. Retesting wasremoved from subsequent grants of EPR.

Vesting 0% vesting <1.2 x WACC

20% vesting at 1.2 x WACC

100% vesting at 1.6 x WACC

with straight line vesting in between.

0% vesting if <50th percentile of index group

50% vesting if aligned to 50th percentile of index group

100% vesting if aligned to 75th percentile of index group

with straight line vesting in between.

Instrument Rights granted after 1 July 2013 may be settled with either IAG ordinary shares or with cash ifperformance hurdles are achieved, as determined by the Board. Rights granted prior to 1 July 2013are settled with IAG ordinary shares.

Key terms of the LTI The number of EPR issued is calculated based on the share price of an IAG ordinary share at 30June. EPR granted during the year will not vest and have no value to the Executive unless theperformance hurdles are achieved. No dividend is paid or payable for any unvested or vested andunexercised EPR.

Forfeiture conditions Under the terms of the LTI, if an Executive ceases employment with the Group voluntarily before theperformance hurdles are tested, the unvested EPR will generally lapse. In cases where the Executiveacts fraudulently or dishonestly or is in breach of his or her obligations to the Group, the unvestedEPR will lapse.

E. LINKING THE GROUP'S PERFORMANCE AND REWARDI. Linking IAG's short term performance and short term rewardThe table below provides a summary of key balanced scorecard objectives and outcomes for the Group for the year ended 30 June2016. The objectives are agreed with the Board at the beginning of each financial year and are designed to stretch the Executivesto deliver sustainable value for shareholders.

TABLE 5 - BALANCED SCORECARD OBJECTIVES AND PERFORMANCE REQUIREMENTS

CATEGORY OBJECTIVE WEIGHTING RESULT OUTCOME

Financialmeasures

Return on risk basedcapital

15% Met The Group sets targets to achieve a return on its risk basedcapital that requires outperformance through the cycle. Thisreturn reflects how effectively IAG uses its capital and is directlyaligned to the Group’s strategic target of achieving a ROE of 1.5times the weighted average cost of capital. In the currentfinancial year, the Group reported a return on risk based capitalthat was aligned to budget.

Profitable growth 10% Did not meet To grow profitably and create value for shareholders, IAGcontinues to develop our products, markets and customer base.In the current financial year, GWP increased for the AustralianConsumer Division and Asia, but was below anticipated in theAustralian Business Division and New Zealand.

Operating costefficiencies

15% Exceeded IAG successfully achieved its operating cost efficiencies byfocusing on simplifying and streamlining our business anddelivering on our synergy commitments.

23

CATEGORY OBJECTIVE WEIGHTING RESULT OUTCOME

Secure position inchosen markets

10% Met Across the Group, IAG’s market position remained stable. Whilefacing a challenging market, IAG was able to maintain marketposition in three of the four markets.

Non-financialmeasures

IAG is the insurer ofchoice

10% Met IAG remains committed to our customers and deliveringexceptional experiences. This has been reflected in maintainingour strong Net Promoter Scores across both the AustralianConsumer Division and New Zealand businesses, proving ourcustomers continue to be advocates for IAG’s brands.

IAG sets the marketbenchmark

10% Exceeded While the Australian Business Division Partner Advocacy scorehas remained stable, CGU Insurance has received notablerecognition from external sources including being voted Insurerof the Year by Insurance Business magazine and winning theNIBA General Insurer of the Year Award.

IAG makescommunities safer,stronger and moreconfident

5% Exceeded IAG is focused on making communities safer, stronger and moreconfident by investing in partnerships, programs and projectsthat create shared value for IAG and the community. Over theyear, IAG received a number of awards and external recognitionfor our responsible business and sustainability practices, whichcover aspects relating to our Governance and Ethics as well asSocial and Environmental performance. We have continued tofocus on initiatives that support indigenous programs, corporatesustainability and community disaster resilience.

IAG attracts andnurtures talent, isagile, flexible and asafe place to work

10% Did not meet The organisational culture has not reached the constructivelevel we aspire to. The 2016 financial year was a time ofchange: we announced a new operating model, set up differentways of working, and introduced simplification initiatives whichimpacted our people. However, during this time, IAG continuedto drive organisational improvement across safety, agility,flexibility, diversity and inclusion, including continued progresson meeting our target of 38% women in senior managementroles by 2020 and positive workplace health and safetyperformance improvement in Australia and New Zealand. Thissets us up well to drive a more constructive culture into thefuture.

Execute FY16-FY18strategic priorities

5% Met IAG’s strategic priorities focus the business on deliveringinitiatives that are the most important for our organisation. Wesuccessfully progressed our current financial year strategicpriorities, including developing and leveraging deep customerinsights and accelerating IAG’s digital transformation.

Effectively governand manage risk

5% Met Strategies have been developed to further uplift IAG’s RiskManagement Framework to manage key organisational risks.Risk management practices contribute strongly to strategic andoperational decision making. Overall effectiveness of RiskManagement at IAG is supported by external validation.

Build capability andagility for futurevalue

5% Exceeded IAG remains dedicated to building capability and agility that willset the foundation for future success. This includes launchingsix new ventures (including Sharecover and InsureLite); buildingHuman Centred Design capability and embedding it across allproduct development and innovation projects; and establishingenterprise-wide customer and digital functions through ourCustomer Labs and Digital Labs teams.


II. STI outcomes for the year ended 30 June 2016STI payments made to Executives for the year ended 30 June 2016 are set out below, and were based on achievement against thebalanced scorecard measures described in table 5. In line with the overall performance, the STI awarded to Executives are, onaverage, slightly higher than last year.

TABLE 6 - ACTUAL STI OUTCOMES FOR THE YEAR ENDED 30 JUNE 2016

MAXIMUM STIOPPORTUNITY ACTUAL STI OUTCOME

CASH STIOUTCOME

(2/3 OF OUTCOME)

DEFERRED STIOUTCOME

(1/3 OF OUTCOME)

(% of fixed pay)(a) (% of maximum)(b) (% of fixed pay) (% of fixed pay) (% of fixed pay)

Peter Harmer 139 % 68 % 94 % 63 % 31 %

Julie Batch 103 % 70 % 72 % 48 % 24 %

Chris Bertuch 103 % 55 % 56 % 38 % 18 %

Ben Bessell 120 % 50 % 60 % 40 % 20 %

Duncan Brain 120 % 72 % 86 % 58 % 28 %

David Harrington 103 % 70 % 72 % 48 % 24 %

Nicholas Hawkins 120 % 73 % 88 % 58 % 30 %

Jacki Johnson 120 % 67 % 80 % 54 % 26 %

Anthony Justice 103 % 74 % 76 % 51 % 25 %

Mark Milliner 120 % - % - % - % - %

Craig Olsen 100 % 68 % 68 % 45 % 23 %

Claire Rawlins 101 % 73 % 74 % 49 % 25 %

Clayton Whipp 120 % 67 % 80 % 54 % 26 %

(a) Executives who had a change in role during the year have their incentive opportunity pro-rated between their prior role and their current role. Therefore, the STI opportunity is less than 150% of fixed pay for Peter Harmer and less than 120% of fixed pay for the newly appointed Executive team members.

(b) The proportion of STI forfeited is derived by subtracting the actual % of maximum received from 100% and was 33% on average for the year ended 30 June 2016(compared to 39% in 2015).

III. Linking the Group's long term performance and long term rewardDetails of LTI vested during the year are set out below:

ROE – 100% vesting

For the performance period ended 30 June 2015, the averagecash ROE was 2.47 times WACC. This resulted in full vesting ofthe ROE portion of the 2012/2013 Series 5 EPR. This strongcash ROE performance has similarly been reflected in thedividend provided to shareholders

TSR – 54% vesting

For the performance period ended 30 September 2015, IAG’sTSR was ranked at the 52nd percentile of its peer group. Thisranking translates to 54% vesting of the TSR portion of the2012/2013 EPR. A retest will occur on 30 September 2016.

The following table shows the returns IAG delivered to its shareholders for the last five financial years for a range of measures.

TABLE 7 - HISTORICAL ANALYSIS OF SHAREHOLDER RETURN ON LTI

YEAR ENDED30 JUNE 2012





Closing share price ($) 3.48 5.44 5.84 5.58 5.45

Dividend paid per ordinary share (cents) 17.00 36.00 39.00 29.00 36.00

Basic earnings per share (cents) 10.01 37.57 56.09 31.22 25.79

Cash ROE (%) 13.3 25.3 23.0 15.3 13.0

ROE to WACC outcome for EPR Plan 1.12 1.83 2.34 2.47 2.00

TSR for the financial year (%)* 5.3 59.2 15.6 1.8 4.3

* This represents the TSR performance measured for the 12 months from 1 July to 30 June.

25

F. EXECUTIVE EMPLOYMENT AGREEMENTSAll employment agreements for Executives are for unlimited terms but may be terminated by written notice from either party or byIAG making a payment in lieu of notice. The employment agreements outline the components of remuneration paid to eachExecutive and require annual review of Executives’ remuneration, although the agreements do not require IAG to increase basesalary, pay STI or offer an LTI in any given year.

All Executive contracts have a 12 month notice period from the relevant company for termination and the Executives must providesix months' notice, with the exception of Nicholas Hawkins who has an employee notice period of three months. Executives areemployed by Insurance Australia Group Services Pty Limited, except for Craig Olsen who is employed by IAG New Zealand Limited.

I. RetrenchmentIn the event of retrenchment, Executives (except for Craig Olsen) are entitled to the greater of: the written notice period or payment in lieu of notice as provided in their employment agreement; or

the retrenchment benefits due under the company retrenchment policy.

For Executives based in Australia, the minimum benefit under the retrenchment policy is 11 weeks of base salary with a maximumbenefit of 87 weeks of base salary. The maximum benefit is payable to employees with service of 25 years or more.

For Craig Olsen, the retrenchment payment is 12 months of fixed pay.

II. Termination of employment without notice and without payment in lieu of noticeThe employment of an Executive may be terminated without notice and without payment in lieu of notice in some circumstances.

Generally, this could occur where the Executive: is charged with a criminal offence that could bring the organisation into disrepute;

is declared bankrupt;

breaches a provision of their employment agreement;

is guilty of serious and wilful misconduct; or

unreasonably fails to comply with any material and lawful direction given by the relevant company.

III. Termination of employment with notice or payment in lieu of noticeThe employment of an Executive may be terminated at any time by the relevant company with 12 months notice or payment in lieuof notice. Payment in lieu of notice will be calculated based on fixed pay. If an Executive terminates voluntarily they are required toprovide six months' notice, with the exception of Nicholas Hawkins who is required to provide three months' notice.

Subject to the relevant legislation in the various jurisdictions, termination provisions may include the payment of annual leaveand/or long service leave for the Executives.

IV. Retired and Retrenched ExecutivesAll termination benefits provided to retired and retrenched Executives were consistent with IAG’s termination policy as disclosed inthe Remuneration Report and did not exceed the level that would require shareholder approval under the Corporations Act 2001(Terminations Cap).

Details of the payments received by retired and retrenched Executives are outlined below:Michael Wilkins

Retirement$000

(1)

Andy CornishRetrenchment

$000(2)

Alex HarrisonRetrenchment

$000(2)

Leona MurphyRetrenchment

$000(3)

Termination benefits 2,257 816 565 923Other benefits - 270 217 295Total benefits 2,257 1,086 782 1,218

(1) Termination benefits for Michael Wilkins include payment in lieu of notice and STI payment made ahead of the annual payment date.

(2) Termination benefits for Andy Cornish and Alex Harrison include contractual payments in lieu of notice that were above the redundancy entitlements required by therelevant statutes, and outplacement services. Other benefits include payment in lieu of notice and redundancy payments aligned to statutory entitlements.

(3) Termination benefits for Leona Murphy include contractual payment in lieu of notice that was above the redundancy entitlements required by the relevant statutes, andSTI payment made ahead of the regular annual payment date. Other benefits include payment in lieu of notice and redundancy payment aligned to statutoryentitlements.


G. STATUTORY REMUNERATION DISCLOSURE REQUIREMENTSI. Total remuneration for ExecutivesStatutory remuneration details for Executives as required by Australian Accounting Standards are set out below:

TABLE 8 - STATUTORY REMUNERATION DETAILS (EXECUTIVES)

SHORT TERM EMPLOYMENTBENEFITS

POSTEMPLOY-

MENTBENEFITS

OTHERLONGTERM

EMPLOY-MENT

BENEFITS

TERM-INATION

BENEFITS SUB-TOTAL SHARE-BASED PAYMENT TOTAL

AT-RISKREMUN-ERATION

PAID

Basesalary Cash STI

Leaveaccruals

and otherbenefits

Superan-nuation

Longservice

leaveaccruals

Value ofdeferred

STI

Value ofrights

granted

as a % oftotal

reward

$000 $000 $000 $000 $000 $000 $000 $000 $000 $000 %

(1) (2) (3) (4) (5) (6) (7) (8)

EXECUTIVES

Peter Harmer

2016 1,425 905 16 35 54 - 2,435 313 1,016 3,764 59

2015 977 473 (37) 35 14 - 1,462 341 1,032 2,835 65

Julie Batch

2016 326 153 16 17 18 - 530 110 171 811 54

Chris Bertuch

2016 380 138 25 20 8 - 571 131 195 897 52

Ben Bessell

2016 656 271 (5) 30 36 - 988 86 156 1,230 42

2015 116 65 (10) 7 3 - 181 - - 181 36

Duncan Brain

2016 899 532 245 35 16 - 1,727 815 719 3,261 63

2015 886 469 243 35 20 - 1,653 167 534 2,354 50

David Harrington

2016 326 160 29 20 4 - 539 96 163 798 53

Nicholas Hawkins

2016 996 593 (35) 30 (13) - 1,571 341 977 2,889 66

2015 982 603 68 30 (12) - 1,671 353 1,007 3,031 65

Jacki Johnson(9)

2016 1,025 585 78 28 14 - 1,730 258 957 2,945 61

2015 1,096 418 (50) - 7 - 1,471 287 940 2,698 61

Anthony Justice

2016 355 156 (17) 17 11 - 522 64 76 662 45

Mark Milliner

2016 176 - 19 5 1 - 201 - - 201 -

Craig Olsen(10)

2016 330 124 36 - - - 490 75 130 695 47

Claire Rawlins

2016 321 152 30 20 2 - 525 - 21 546 32

Clayton Whipp

2016 749 415 48 35 16 - 1,263 184 321 1,768 52

2015 720 341 29 35 35 - 1,160 138 208 1,506 46

27

SHORT TERM EMPLOYMENTBENEFITS

POSTEMPLOY-

MENTBENEFITS

OTHERLONGTERM

EMPLOY-MENT

BENEFITS

TERM-INATION

BENEFITS SUB-TOTAL SHARE-BASED PAYMENT TOTAL

AT-RISKREMUN-ERATION

PAID

Basesalary Cash STI

Leaveaccruals

and otherbenefits

Superan-nuation

Longservice

leaveaccruals

Value ofdeferred

STI

Value ofrights

granted

as a % ofTotal

Reward

$000 $000 $000 $000 $000 $000 $000 $000 $000 $000 %

(1) (2) (3) (4) (5) (6) (7) (8)

EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL

Michael Wilkins

2016 801 1,197 144 7 (190) 1,060 3,019 1,383 3,898 8,300 78

2015 2,093 1,314 188 19 44 - 3,658 898 2,525 7,081 67

Andy Cornish

2016 846 887 29 29 20 1,086 2,897 505 2,421 5,823 65

2015 1,017 602 73 35 20 - 1,747 307 1,048 3,102 63

Alex Harrison

2016 139 - (31) 6 25 782 921 126 769 1,816 49

2015 819 611 29 30 22 - 1,511 144 308 1,963 54

Leona Murphy

2016 450 410 21 16 31 808 1,736 484 2,121 4,341 69

2015 880 505 20 30 18 - 1,453 298 907 2,658 64

(1) Base salary includes amounts paid in cash plus the portion of the Company’s superannuation contribution that is paid as cash instead of being paid into superannuationplus salary sacrifice items such as cars and parking, as determined in accordance with AASB 119 Employee Benefits.

(2) Cash STI represents the amount to be settled in cash in relation to the financial year from 1 July 2015 to 30 June 2016.

(3) This column includes leave accruals, 30% tax rebate on car allowances for certain KMP who have salary sacrifice arrangements on cars and other short term employmentbenefits as agreed and provided under specific conditions. Other benefits provided under specific conditions for KMP are provided as follows: Duncan Brain:accommodation allowances, airfares for home visits and medical insurance.

(4) Superannuation represents the employer’s contributions.

(5) Long service leave accruals as determined in accordance with AASB 119.

(6) Termination benefits include payment in lieu of notice, redundancy entitlements and outplacement services (where provided).

(7) The deferred STI is granted as DAR and is valued using the Black-Scholes valuation model. An allocated portion of unvested DAR for financial years prior to 30 June 2015is included in the total remuneration disclosure above. The deferred STI for the year ended 30 June 2016 will be granted in the next financial year, so no value wasincluded in the current financial year’s total remuneration.

(8) This value represents the allocated portion of unvested EPR. To determine the EPR values the Monte Carlo simulation (for the TSR performance hurdle) and Black-Scholesvaluation (for the ROE performance hurdle) models have been applied. The valuation takes into account the exercise price of the EPR, life of the EPR, price of IAG ordinaryshares as at 30 June, expected volatility of the IAG share price, expected dividends, risk free interest rate, performance of shares in the peer group of companies, earlyexercise and non-transferability and turnover which is assumed to be zero for an individual's remuneration calculation.

(9) Remuneration for Jacki Johnson for the period 1 July 2015 to 1 January 2016 was determined in New Zealand dollars and reported in Australian dollars.

(10) Remuneration for Craig Olsen was determined in New Zealand dollars and reported in Australian dollars.


II. Movement in equity plans within the financial yearChanges in each Executive’s holding of DAR and EPR during the financial year are set out below. The DAR granted during the yearreflect the deferred portion of the STI outcome for the year ended 30 June 2015. The EPR granted during the year ended 30 June2016 were in relation to the LTI plan.

TABLE 9 - MOVEMENT IN POTENTIAL VALUE OF DAR AND EPR FOR THE YEAR ENDED 30 JUNE 2016(1)

RIGHTS ONISSUE 1 JULY

(2)

RIGHTS GRANTED DURINGTHE YEAR

(3)

RIGHTS EXERCISED DURINGTHE YEAR

(4)

RIGHTS ONISSUE

30 JUNE

RIGHTSVESTED

DURING THEYEAR

RIGHTSVESTED AND

EXERCISABLE30 JUNE

Number Number Value ($000) Number Value ($000) Number Number Number

EXECUTIVES

Peter Harmer DAR 90,600 42,500 220 (60,450) 331 72,650 60,450 -

EPR 799,200 370,200 1,343 (271,117) 1,485 898,283 271,117 -

Julie Batch DAR 48,050 - - (18,600) 102 29,450 18,600 -

EPR 162,800 54,400 197 (40,271) 221 176,929 40,271 -

Chris Bertuch DAR 33,950 - - - - 33,950 - -

EPR 138,545 64,500 234 - - 203,045 - -

Ben Bessell DAR 22,550 16,500 85 (16,200) 89 22,850 16,200 -

EPR 101,100 108,600 394 (10,000) 55 199,700 30,569 20,569

Duncan Brain DAR 47,700 400,600 2,074 (29,950) 164 418,350 29,950 -

EPR 474,200 207,000 751 (51,821) 284 629,379 51,821 -

David Harrington DAR 29,450 - - - - 29,450 - -

EPR 130,191 52,300 190 - - 182,491 - -

Nicholas Hawkins DAR 93,150 54,000 280 (61,800) 338 85,350 61,800 -

EPR 799,200 227,400 825 (271,117) 1,485 755,483 271,117 -

Jacki Johnson DAR 73,300 37,500 194 (49,100) 269 61,700 49,100 -

EPR 756,700 244,500 887 (244,167) 1,337 757,033 244,167 -

Anthony Justice DAR 20,600 - - - - 20,600 - -

EPR 57,500 65,300 237 - - 122,800 - -

Mark Milliner(5) DAR - - - - - - - -

EPR - - - - - - - -

Craig Olsen DAR 34,000 - - (13,650) 75 20,350 13,650 -

EPR 115,000 62,600 227 (22,638) 124 154,962 22,638 -

Claire Rawlins DAR - - - - - - - -

EPR - 75,500 274 - - 75,500 - -

Clayton Whipp DAR 34,650 53,200 274 (22,700) 124 65,150 22,700 -

EPR 178,900 173,700 630 (46,046) 252 306,554 46,046 -EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL

Michael Wilkins DAR 230,950 117,800 610 (154,050) 844 194,700 154,050 -

EPR 2,002,500 - - (679,448) 3,720 1,323,052 679,448 -

Andy Cornish DAR 70,750 54,000 280 (49,900) 273 74,850 49,900 -

EPR 831,400 236,500 858 (282,128) 1,545 785,772 282,128 -

Alex Harrison DAR 37,600 - - - - 37,600 - -

EPR 290,300 - - - - 290,300 32,050 32,050

Leona Murphy DAR 75,250 45,300 235 (50,850) 278 69,700 50,850 -

EPR 719,500 204,700 743 (244,090) 1,337 680,110 244,090 -

(1) There were no rights that lapsed or were forfeited but not yet lapsed during the year.

(2) Opening number of rights on issue represents the balance as at the date of appointment as KMP or 1 July 2015.

(3) The value of the DAR granted during the year is the fair value at grant date calculated using the Black-Scholes valuation model. The value of the annual DAR granted on2 November 2015 and 31 March 2016 was $5.18 and $5.25 respectively. This amount is allocated to remuneration over years ending 30 June 2016 to 30 June 2018.Additional DAR grants of 358,500 to Duncan Brain and 22,600 to Clay Whipp were granted on 2 November 2015 have an expiry date of 2 November 2022 and areexercisable on 20 December 2017 and 1 September 2018 respectively. The value of the 358,500 DAR granted was $4.97 and this amount is allocated to remunerationover years ending 30 June 2016 to 30 June 2018. The value of the 22,600 DAR granted was $4.76. This amount is allocated to remuneration over the years ending 30June 2016 to 30 June 2019. The value of the ROE portion of the EPR granted on 2 November 2015 and 31 March 2016 is the fair value at grant date, calculated usingthe Black-Scholes valuation model, which was $4.84 and $4.80 respectively. The value of the TSR portion of the EPR granted on 2 November 2015 and 31 March 2016is the fair value at grant date, calculated using the Monte Carlo simulation, which was $2.42 and $2.35 respectively. The ROE portion of the EPR grants is firstexercisable after the performance period concludes on 30 June 2018. The TSR portion of the EPR is first exercisable on 30 September 2019. The amount is allocated toremuneration over the years ending 30 June 2016 to 30 June 2020.

(4) Rights vested on or before 1 September 2015 and exercised during the financial year. The value of the rights exercised is based on the weighted average share pricewhich was $5.48 for the year ended 30 June 2016.

(5) Mark Milliner will receive 150,000 DAR in November 2016 as compensation for incentives foregone on leaving his previous employer.

29

III. LTI awards outstanding during the year ended 30 June 2016Details of outstanding LTI awards made to Executives in the year ended 30 June 2016 are shown in the table below:

TABLE 10 - LTI AWARDS OUTSTANDING DURING THE YEAR ENDED 30 JUNE 2016

AWARD GRANT DATE BASE DATEFIRST TEST

DATELAST TEST

DATE

PERFORMANCEHURDLE

ACHIEVEMENTLAST EXERCISE

DATE

2015/2016 Series 6 - TSR(a) 31/03/2016 30/09/2015 30/09/2019 N/A 31/03/2023

2015/2016 Series 6 - ROE(a) 31/03/2016 01/07/2015 30/06/2018 N/A 31/03/2023

2015/2016 Series 6 - TSR(a) 02/11/2015 30/09/2015 30/09/2019 N/A 02/11/2022

2015/2016 Series 6 - ROE(a) 02/11/2015 01/07/2015 30/06/2018 N/A 02/11/2022

2014/2015 Series 6 - TSR(a) 03/11/2014 30/09/2014 30/09/2018 N/A 03/11/2021

2014/2015 Series 6 - ROE(a) 03/11/2014 01/07/2014 30/06/2017 N/A 03/11/2021

2013/2014 Series 6 - TSR(a) 01/11/2013 30/09/2013 30/09/2017 N/A 01/11/2020

2013/2014 Series 6 - ROE(a)(b) 01/11/2013 01/07/2013 30/06/2016 N/A 01/11/2020

2012/2013 Series 5 - TSR 26/10/2012 30/09/2012 30/09/2015 30/09/2017 54% 26/10/2019

2012/2013 Series 5 - ROE 26/10/2012 01/07/2012 30/06/2015 100% 26/10/2019

(a) Terms and conditions for EPR Plan 2013/2014, 2014/2015 and 2015/2016 are the same, therefore they are all referred to as Series 6.

(b) The cash ROE portion of EPR Plan 2013/2014 has been tested and is expected to vest in full. Vesting details will be included in the Remuneration Report for the year ending 30 June 2017.

H. NON-EXECUTIVE DIRECTOR REMUNERATIONI. Remuneration policyThe principles that underpin IAG’s approach to remuneration for Non-Executive Directors are that remuneration should: be sufficiently competitive to attract and retain a high calibre of Non-Executive Director; and

create alignment between the interests of Non-Executive Directors and shareholders through the mandatory shareholdingrequirement.

II. Remuneration structureNon-Executive Director remuneration has two components: Board fees (paid as cash and superannuation); and

subsidiary board and Committee fees.

a. CHANGES TO NON-EXECUTIVE REMUNERATION DURING THE YEAR ENDED 30 JUNE 2016In August 2015, the Board approved maintaining Board fees at the current level, aligning to the approach taken for Executive fixedpay. The Board approved a Committee fee increase of 22.25% for all Committees except the Nominations Committee, to align feeswith the market. The aggregate limit of Board fees approved by shareholders at the Annual General Meeting in October 2013remains unchanged at $3,500,000 per annum.

The figures shown below are inclusive of superannuation. Directors can elect the portion of fees contributed into their nominatedsuperannuation fund, provided minimum legislated contribution levels are met.

TABLE 11 - BOARD AND COMMITTEE FEES

ROLE

BOARD/COMMITTEE YEAR CHAIRMAN DIRECTOR

Board 2016 $565,800 $188,600

2015 $565,800 $188,600

Audit Committee 2016 $50,000 $25,000

2015 $40,900 $20,450

Risk Committee 2016 $50,000 $25,000

2015 $40,900 $20,450

People and Remuneration Committee 2016 $50,000 $25,000

2015 $40,900 $20,450

Nominations Committee* 2016 N/A $10,000

2015 N/A $10,000

* The Chair of the Nominations Committee is also the Chairman of the Company, therefore no Chair fee is applicable.

b. SUBSIDIARY BOARD AND COMMITTEE FEESA summary of Non-Executive Directors’ service on subsidiary boards and the fees paid is set out below:

TABLE 12 - FEES FOR NON-EXECUTIVE DIRECTORS' SERVICE ON SUBSIDIARY BOARDS

DIRECTOR SUBSIDIARY CAPACITY ANNUAL FEE

Elizabeth Bryan Insurance Manufacturers of Australia Pty Limited Chairman $247,000

Hugh Fletcher* IAG New Zealand Limited Chairman $137,936

* This amount was paid to Hugh Fletcher in New Zealand dollars and reported in Australian dollars.


III. Board performanceThe Board conducts a review of its performance, composition, size and succession planning at least every three years withassistance from external experts (Formal Review). A Formal Review of the Board and each Non-Executive Director (including theChairman), with assistance and input from an independent board performance expert, was conducted in 2016. The Formal Reviewprocess involves the completion of questionnaires by Non-Executive Directors and the Executive team; interviews with theindependent expert; the collation of results; and discussion with individual Non-Executive Directors and the Board as a whole led bythe Chairman. The PARC is responsible for coordinating the Board’s review of the Chairman’s performance.

Measures of a Non-Executive Director’s performance include: contribution to Board teamwork;

contribution to debates on significant issues and proposals;

advice and assistance given to management;

input regarding regulatory, industry and social developments surrounding the business; and

in the case of the Chairman’s performance, the fulfilment of the additional role as Chairman.

IV. Total remuneration detailsDetails of total remuneration for Non-Executive Directors on the Board for the year ended 30 June 2016 are set out below:

TABLE 13 - STATUTORY REMUNERATION DETAILS (NON-EXECUTIVE DIRECTORS)

SHORT TERMEMPLOYMENT BENEFITS POST-EMPLOYMENT BENEFITS

OTHER LONGTERM

EMPLOYMENT

BENEFITS

TERMINATION

BENEFITS

SHAREBASED

PAYMENT TOTAL

IAG Boardfees

received ascash

OtherBoards andCommittee

fees SuperannuationRetirement

benefits

$000 $000 $000 $000 $000 $000 $000 $000NON-EXECUTIVE DIRECTORS

Elizabeth Bryan

2016 276 111 19 - - - - 406

2015 99 6 10 - - - - 115

Alison Deans

2016 172 28 19 - - - - 219

2015 173 37 19 - - - - 229

Hugh Fletcher

2016 172 184 21 - - - - 377

2015 172 177 20 - - - - 369

Raymond Lim

2016 172 23 19 - - - - 214

2015 172 19 18 - - - - 209

Jonathan Nicholson(a)

2016 145 36 14 - - - - 195

Tom Pockett

2016 177 78 19 - - - - 274

2015 86 - 8 - - - - 94

Philip Twyman

2016 177 82 19 - - - - 278

2015 177 80 19 - - - - 276NON-EXECUTIVE DIRECTORS WHO CEASED AS KEY MANAGEMENT PERSONNEL

Brian Schwartz

2016 424 169 14 - - - - 607

2015 568 226 19 - - - - 813

Yasmin Allen

2016 44 16 5 - - - - 65

2015 178 84 19 - - - - 281

(a) Director appointed part way through current financial year.

31

I. RELATED PARTY INTERESTSIn accordance with the Corporations Act Regulation 2M.3.03, the Remuneration Report includes disclosure of related parties.

I. Movements in total number of ordinary shares heldThe relevant interests of each key management personnel and their related parties in IAG ordinary shares are disclosed in the tablebelow:

TABLE 14 - MOVEMENT IN TOTAL NUMBER OF ORDINARY SHARES HELD

SHARES HELDAT 1 JULY

SHARESRECEIVED ONEXERCISE OF

DAR

SHARESRECEIVED ONEXERCISE OF

EPR

NETMOVEMENT OF

SHARES DUETO OTHER

CHANGES(a)

TOTAL SHARESHELD

AT 30 JUNE

SHARES HELDNOMINALLY AT

30 JUNE(b)

Number Number Number Number Number Number

2016NON-EXECUTIVE DIRECTORS AND EXECUTIVES

Elizabeth Bryan 31,409 - - 1,316 32,725 32,725

Alison Deans 37,742 - - - 37,742 37,742

Hugh Fletcher 80,707 - - 1,325 82,032 45,471

Raymond Lim 30,000 - - 5,000 35,000 35,000

Jonathan Nicholson(c) 1,468 - - 10,000 11,468 1,041

Tom Pockett 32,096 - - 155 32,251 -

Philip Twyman 31,272 - - (15,750) 15,522 12,780

Peter Harmer 624,400 60,450 271,117 (300,000) 655,967 172,800

Julie Batch(c) 124,036 18,600 40,271 - 182,907 277

Chris Bertuch(c) 53,840 - - 40 53,880 380

Ben Bessell 464 16,200 10,000 (26,200) 464 277

Duncan Brain 152,987 29,950 51,821 - 234,758 -

David Harrington(c) 1,227 - - 160 1,387 789

Nicholas Hawkins 200,000 61,800 271,117 (312,917) 220,000 -

Jacki Johnson 1,299,493 49,100 244,167 (1,366,827) 225,933 225,933

Anthony Justice(c) - - - - - -

Mark Milliner(c) - - - - - -

Craig Olsen(c) 130,765 13,650 22,638 (43,650) 123,403 14,800

Claire Rawlins(c) - - - - - -

Clayton Whipp 32,381 22,700 46,046 187 101,314 1,378NON-EXECUTIVE DIRECTORS AND EXECUTIVES WHO CEASED AS KEY MANAGEMENTPERSONNEL(d)

Brian Schwartz 111,171 - - 2,348 113,519 110,963

Yasmin Allen 41,753 - - - 41,753 40,087

Michael Wilkins 2,048,030 154,050 679,448 - 2,881,528 1,207,840

Andy Cornish 203,081 49,900 282,128 (185,000) 350,109 -

Alex Harrison - - - - - -

Leona Murphy 340,660 50,850 244,090 99 635,699 114,644

(a) Net movement of shares relates to acquisition and disposal transactions by the KMP and their related parties during the year.

(b) Shares nominally held are included in the column headed total shares held at 30 June and include those held by the KMP's related parties, inclusive of domesticpartner, dependants and entities controlled, jointly controlled or significantly influenced by the KMP.

(c) Opening number of shares held represents the balance as at the date of appointment.

(d) Information on shares held is disclosed up to the date of cessation.

II. Movements in total number of convertible preference sharesPhilip Twyman acquired 994 (2015-1,100) convertible preference shares during the year, indirectly holding a total of 5,109 sharesas at 30 June 2016. No other key management personnel had any interest directly or nominally in convertible preference shares atany time during the financial year (2015-nil).

III. Movements in total number of reset exchangeable securities heldNo key management personnel had any interest directly or nominally in reset exchangeable securities of IAG Finance (New Zealand)Limited at any time during the financial year (2015-nil).


J. KEY TERMS AND DEFINITIONSThe key terms and definitions used throughout this report are explained below:

TERM DEFINITION

Actual remuneration The dollar value of remuneration actually received by the Executives in the financial year.This is the sum of fixed pay plus the cash portion of the STI plus the value of DAR vestedduring the year plus the value of EPR vested during the year.

At-risk remuneration Remuneration that is dependent on a combination of the financial performance of the Group,the Executives' performance against individual measures (financial and non-financial) andcontinuing employment. At-risk remuneration typically includes STI (cash and deferredremuneration) and LTI.

Balanced scorecard The balanced scorecard sets out the objectives that have to be achieved to meet keystrategic priorities of the organisation. All balanced scorecards use goals set againstfinancial and non financial objectives. Achievement against these objectives is measuredand this informs the Board's determination of STI outcomes.

Base salary The cash component of fixed pay.

Cash return on equity (ROE) Calculated as cash earnings divided by average total shareholders’ equity during the financialyear. Cash earnings is defined as net profit after tax attributable to IAG shareholders plusamortisation and impairment of acquired identifiable intangible assets and adjusted forunusual items after tax (non-recurring in nature). Cash ROE is used to calculate one half ofthe outcome in the LTI plan.

Cash STI The two thirds portion of an Executive’s STI outcome that is paid in the form of cash, followingthe end of year assessment and approval by the Board.

Deferred STI/Deferred Award Rights(DAR)

The one third portion of an Executive’s STI that is deferred over a period of two years andawarded in the form of DAR.

Divisional Executives The Executives with responsibility for managing a division, being the Chief Executive,Australian Consumer Division; Chief Executive, Australian Business Division; Chief Executive,New Zealand; and Chief Executive, Asia.

Executive team The Divisional and Group Executives who form part of the Group Leadership Team.

Executives The Group CEO and the Executive team.

Fixed Pay Base salary plus superannuation. Individuals can determine the mix of base salary andsuperannuation they receive in line with legislative requirements.

Group CEO IAG’s Managing Director and Chief Executive Officer.

Group Executives The Chief Financial Officer; Chief Operating Officer; Chief Risk Officer; Chief Customer Officer;Group Executive, Digital & Technology; Group Executive, Office of the CEO; Group GeneralCounsel & Company Secretary; and Group Executive, People, Performance & Reputation.

IAG Spirit The IAG Spirit, Closer, Braver, Faster is a set of statements that capture a shared view acrossIAG of how we work together, what we stand for and what makes us unique.

Key management personnel (KMP) The Group CEO, the Executive team and the Board.

Long term incentive (LTI)/ExecutivePerformance Rights (EPR)

A grant of rights in the form of EPR that is exercisable for IAG ordinary shares or cashbetween three and four years after the grant date if performance hurdles are achieved.

People and RemunerationCommittee (PARC)

The Board committee which oversees IAG's remuneration practices.

Short term incentive (STI) The part of annual at-risk remuneration that is designed to motivate and reward for annualperformance. STI results are determined by performance against a balanced scorecard,based on goals which reflect financial and non-financial measures. For the Group CEO andthe Executive team, one third of STI is deferred for a period of two years and two thirds is paidin cash in September.

Total shareholder return (TSR) Used as one measure of Group performance over a period of time. TSR combines share priceappreciation and dividends paid to show total return to shareholders, relative to that of othercompanies in the peer group. IAG uses relative TSR performance to calculate one half of theLTI outcome.

WACC Weighted average cost of capital.

33

RELEVANT INTEREST OF EACH DIRECTOR AND THEIR RELATED PARTIES IN LISTED SECURITIES OF THEIAG GROUP IN ACCORDANCE WITH THE CORPORATIONS ACT 2001

HOLDINGS OF SHARES AND RESET EXCHANGEABLE SECURITIES FOR SECTION 205G OF THE CORPORATIONS ACT 2001Ordinary Shares Convertible Preference Shares Reset Exchangeable Securities

Held directly(a) Held indirectly(b) Held directly Held indirectly Held directly Held indirectly

Elizabeth Bryan - 32,725 - - - -

Alison Deans - 37,742 - - - -

Hugh Fletcher 36,561 45,471 - - - -

Raymond Lim - 35,000 - - - -

Jonathan Nicholson 10,427 1,041 - - - -

Tom Pockett 32,251 - - - - -

Philip Twyman 2,742 12,780 - 5,109 - -

Peter Harmer 483,167 172,800 - - - -

(a) This represents the relevant interest of each Director in ordinary shares issued by the Company, as notified by the Directors to the ASX in accordance with section 205G ofthe Corporations Act 2001 until the date the financial report is signed. Trading in IAG shares is covered by the restrictions which limit the ability of an IAG Director to tradein the securities of the Group where they are in a position to be aware, or are aware, of price sensitive information.

(b) These IAG shares are held by the Director’s related parties, inclusive of entities controlled, jointly controlled or significantly influenced by the Directors, as notified by theDirectors to the ASX in accordance with section 205G of the Corporations Act 2001.

ROUNDING OF AMOUNTSUnless otherwise stated, amounts in the financial report and Directors' Report have been rounded to the nearest million dollars.The Company is of a kind referred to in the ASIC Corporations Instrument 2016/191 dated 24 March 2016 issued by the AustralianSecurities & Investments Commission. All rounding has been conducted in accordance with that instrument.

This report meets the remuneration reporting requirements of the Corporations Act 2001 and Accounting Standard AASB 124Related Party Disclosures. The term remuneration used in this report has the same meaning as compensation as prescribed inAASB 124.

Signed at Sydney this 19th day of August 2016 in accordance with a resolution of the Directors.

Peter HarmerDirector


Documents

DIRECTORS' REPORT - IAG Limited€¦ · DIRECTORS WHO CEASED DURING THE FINANCIAL YEAR Brian Schwartz was a Director from 1 January 2005 to 31 March 2016; Michael Wilkins was a Director